Natural Gas Bulls Must Watch the Rig Count

Natural gas rig count

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

Natural Gas Bulls Must Watch the Rig Count

Between January 2008 and September 2018, US natural gas’s marketed production rose ~58% despite the falling natural gas rig count. As a result of the increased supply, natural gas active futures have fallen 43.2% since January 2008.

Rising US oil production is the driving factor 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.

Crude oil rig count

Between January 4, 2008, and November 30, 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 March 2019. 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 one to 887—still near its multiyear high.

Based on the Drilling Productivity Report released by the U.S. Energy Information Administration on November 13, the natural gas production in major US shale regions could rise 20.6% year-over-year in December. Natural gas bears might appreciate the increased supply, which could 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) returned -3.3%, -6.8%, and 3.5%, respectively. In the last five trading sessions, natural gas January futures rose 3.8%.

In the seven days that ending on December 4, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) rose 0.4% and 1.5%, respectively. These ETFs contain natural gas–producer stocks that could be sensitive to the oil and gas rig counts.