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Why Oil Rigs Might Concern Natural Gas Bulls

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Nov. 20 2020, Updated 12:24 p.m. ET

Natural gas rig count

The natural gas rig count was at 197 last week, which was one less than the previous week. In the previous week, the rig count was at the highest level since September 2015. The natural gas rig count has fallen ~87.7% from its record level of 1,606 in 2008.

Between January 2008 and October 2018, US natural gas’s marketed production rose ~64.5% despite the falling natural gas rig count. As a result of the increased supply, natural gas active futures have fallen 62.4% since January 2008.

Rising US oil production is the key factor behind the increase in natural gas supplies. Since natural gas is often a by-product of US shale oil production, it’s important to monitor the oil rig count to understand natural gas supplies.

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Crude oil rig count

Between January 4, 2008, and January 25, 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. A higher oil rig count could boost crude oil and natural gas supplies and pressure natural gas prices. Last week, the oil rig count rose by ten to 862—a concern for natural gas prices.

Based on the drilling productivity report from the U.S. Energy Information Administration on January 22, the natural gas production in major US shale regions could rise 21% year-over-year in February. 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) rose 2.2%, 4.7%, and 1.9%. During this period, natural gas March futures fell 7.1%.

In the seven days ending on January 29, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR ETF (XLE) returned -0.5% and 0.1%, respectively. These ETFs contain natural gas producer stocks that could be sensitive to the oil and gas rig counts.

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