A:

Trends in rig counts are important to investors in the oil and gas sector because they reveal the sector's supply dynamics. Rig counts are unveiled at the end of every week, and they tend to correlate with oil and gas prices. As prices rise, producers increase production. When oil and gas prices decline, the rig count declines, although the pace of the decline depends on credit conditions and circumstances in the energy market.

However, the rig count's responsiveness to changes in oil prices is a key factor in forecasting the price of oil and gas -- ultimately the most important input in determining companies' profitability in the sector. Additionally, these prices positively correlate to investment in new projects and whether companies can easily borrow money to expand operations.

Therefore, investors desire any data point that yields additional insight into prices in the oil and gas sector. The rig count is a tool to understand future supply trends. For example, if oil and gas prices drop and rig counts drop as well, it is more likely oil and gas prices will bounce back as supply decreases. If oil and gas prices drop and rig counts do not drop, it is more likely the price of oil and gas remains low, until it is low enough to cause production to decrease.

Supply and demand are the two components in determining price. Demand for oil and gas fluctuates with economic growth. Supply depends on production and storage. The rig count is one forward indicator of supply dynamics.

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