Why the Oil Rig Count Could Impact Natural Gas
Natural gas rigs
On September 2, 2016, the natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) rig count was 88—seven more than the previous week. The number of active natural gas rigs has fallen by 104 over the past year. One year ago, there were 202 natural gas rigs.
Notably, the natural gas rig count for the week ending September 2, 2016, was 94.5% lower than its peak in 2008. The rig count reached a historic high of 1,606 in 2008.
The natural gas rig count for the week ending September 8 will be released by Baker Hughes (BHI) on September 8, 2016.
Crude oil rigs and natural gas production
On September 2, the US crude oil rig count was 407—one more than in 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.
Flat oil rigs
In the past three weeks as of September 2, 2016, the number of active oil rigs has been almost flat, which is a bullish catalyst for natural gas. So the oil rig count—not just the natural gas rig count—will be an important thing to watch alongside natural gas prices this week.
Natural gas prices and ETFs
The above 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.
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 US Energy ETF (IYE), and the Fidelity MSCI Energy Index ETF (FENY).
See part 1 ( here)
Photos credit Market Realist
Recommended reading: Source Market Realist Part 2