Why Natural Gas Investors Should Watch Oil Rigs
On August 26, 2016, the natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) rig count was 81—two less compared to the previous week. The number of active natural gas rigs has fallen by 121 over the past year. A year ago, there were 202 natural gas rigs. Notably, the natural gas rig count for the week ending August 26, 2016, was 94.9% lower than its peak in 2008. The rig count reached a historic high of 1,606 in 2008.
Crude oil rigs and natural gas production
On August 26, the US crude oil rig count was 406—unchanged compared to the previous week. Despite the fall in the number of natural gas rigs since August 2008, natural gas production continued to rise. This can be explained by the fact that natural gas is an associated product of crude oil (USO) (OIIL) (UWTI) (USL) extraction. Over the past ten years, natural gas production has moved more in tandem with the crude oil rig count than with the natural gas rig count.
Rising crude oil prices after the subprime mortgage crisis kept the number of oil rigs rising until June 2014. With increasing crude oil extraction, the natural gas production also kept rising. Increasing rig efficiency also helped US natural gas companies produce more natural gas with fewer rigs.
Natural gas prices and ETFs
This trend helped boost natural gas production and suppress natural gas prices despite a fall in the number of active natural gas rigs. If the number of oil rigs keeps rising, it could boost natural gas production and pressure prices more.
Given the impact on production and energy prices, the rig count impacts ETFs such as the ProShares Ultra Oil & Gas ETF (DIG), the PowerShares DWA Energy Momentum Portfolio (PXI), the Vanguard Energy ETF (VDE), the iShares U.S. Energy ETF (IYE), and the Fidelity MSCI Energy Index ETF (FENY).
Recommended reading (part 2): Market Realist
Additional Reading : WSJ