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Oil Rigs Might Be a Concern for Natural Gas Bulls

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Nov. 20 2020, Updated 4:54 p.m. ET

Natural gas rig count

The natural gas rig count was at 186 last week—unchanged from the previous week. However, the natural gas rig count has fallen ~88.4% from its record level of 1,606 in 2008. US natural gas marketed production rose ~51.9% between January 2008 and May 2018 despite the falling natural gas rig count. As a result of the increased supply, natural gas active futures have fallen 62% since January 2008.

Rising US oil production is behind the rise in natural gas supplies. Since natural gas is often a by-product of US shale oil production, it’s important to watch the oil rig count to understand natural gas supplies. The above chart shows the relationship between the rig count and natural gas production.

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Crude oil rig count

Between January 4, 2008, and August 17, 2018, the oil rig count more than doubled. Based on the relationship between oil prices and the oil rig count, the oil rig count might keep rising until at least November. A higher rig count could boost crude oil and natural gas supplies and pressure natural gas prices. Last week, the oil rig count was unchanged at 869. The oil rig count has sustained its highest level since the week ending March 6, 2015.

Based on the EIA’s (U.S. Energy Information Administration) Drilling Productivity report released on August 13, the natural gas production in major US shale regions could rise 22.8% year-over-year in September. Natural gas bears will likely appreciate the increased supply because it could spell trouble for natural gas prices.

Energy stocks and energy ETFs

In the trailing week, natural gas–weighted stocks Chesapeake Energy (CHK), Southwestern Energy (SWN), and Cabot Oil & Gas (COG) rose 1.1%, 1.1%, and 3.3%, respectively. In the past five trading sessions, natural gas September futures rose 0.7%.

In the seven calendar days to August 21, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) fell ~0.3% and ~1.4%, respectively. These ETFs contain natural gas producer stocks that could be sensitive to the oil and gas rig count.

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