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Oil Rigs and Higher Natural Gas Prices

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Nov. 20 2020, Updated 2:57 p.m. ET

Natural gas rig count

The natural gas rig count was at 189 last week—three more than the previous week. However, the natural gas rig count has fallen ~88.2% from its record level of 1,606 in 2008.

Between January 2008 and July 2018, US natural gas marketed production rose ~57.6% despite the falling natural gas rig count. As a result of the increased supply, natural gas active futures have fallen 59.7% since January 2008.

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Rising US oil production is the driving factor behind the rise in natural gas supplies. Because 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.

Crude oil rig count

Between January 4, 2008, and September 28, 2018, the oil rig count more than doubled. Based on the relationship between oil prices and the oil rig count, the oil rig count is expected to keep rising until at least November. A higher oil rig count could boost crude oil and natural gas supplies and pressure natural gas prices. Last week, the oil rig count fell by three to 863.

Based on the Drilling Productivity Report released by the EIA on September 18, the natural gas production in major US shale regions could rise 22.3% year-over-year in October. Natural gas bears might appreciate the increased supply, which might impact natural gas’s rise.

Energy stocks and energy ETFs

In the trailing week, natural gas–weighted stocks Chesapeake Energy (CHK), Southwestern Energy (SWN), and Cabot Oil & Gas (COG) have fallen 2.2%, 10.1%, and 1.7%, respectively. In the last five trading sessions, natural gas November futures rose 3.5%.

In the seven calendar days ending on October 2, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) returned -0.2% and 0.2%, respectively. These ETFs contain natural gas producer stocks that could be sensitive to oil and gas rig counts.

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