In a bizarre world, anything’s possible. With the coronavirus beginning to change every aspect of life as we know it, there’s no limit to the shock and awe we’re treated to on a daily, if not hourly, basis. From entire country lockdowns to en masse cancellations of sports and public events and a Wall Street that’s turned from bull to bear market, the list goes on.
Now, add something else to it: a natural gas market that’s suddenly looking better than the oil market.
What may have seemed like an outlandish idea just weeks ago is turning out to be not so ludicrous — even after gas prices hit their lowest levels in two decades this week.
Record production from booming shale fields has always kept gas oversupplied. In contrast, oil, despite the U.S. fracking boom, has always had its output moderated at the global level by OPEC and the cartel’s production cuts.
Oil’s Prospects Have Dramatically Turned South
But since Friday, oil’s prospects have dramatically turned south, with OPEC kingpin Saudi Arabia abandoning all production restraint amid a price war with Russia.
U.S. crude prices suffered a 25% crash on Monday, following the Saudi decision. Natural gas’ front-month contract on the New York Mercantile Exchange’s Henry Hub initially tumbled as well on Monday to a 1998 low. From there, however, it took off, rallying a total of 13% over two days before giving back some 3% on Wednesday.
“This was a rally driven by both short covering and general optimism that U.S. gas production will drop as lower prices of oil will result in lower output of shale-related gas,” said Scott Shelton, energy futures broker at ICAP in Durham, North Carolina.
Notwithstanding its own supply glut, the fundamentals for gas look better compared to oil, which will receive an avalanche of cheap Saudi supply from April, said Shelton.
Gas In A Better Position Than Oil
That’s not all. The relative return on gas to oil is also now better.
While both commodities are down sharply on the year, gas is only about 17% in the negative.
U.S. crude, meanwhile, is off by nearly 50% — making it by far the worst performer from a list of 35 commodities tracked by Investing.com.
Bottom line: Gas is technically in a more advantaged position now, after playing second fiddle to oil for almost as long as the two have traded side-by-side on the New York Mercantile Exchange.
“Natural gas bulls may be enjoying a bit of schadenfreude this week to see the impacts of aggressive shale growth move beyond the crippled natural gas market and into the oil patch,” said Dan Myers, analyst at Gelber & Associates, a Houston-based gas consultancy.
But Myers is also realistic about gas prospects beyond its mere comparison with crude.
He notes that Henry Hub’s front-month contract has struggled to return to the $2 per mmBtu, or million metric British thermal units, level since leaving that zone on Feb. 20.
“It is a little too early to count on a robust recovery for gas,” said Myers. “Any supply cuts this year will take months to set in. For now, production remains only slightly below record levels.”
Gas Still Needs To Overcome Huge Stockpiles, Weak Weather
Gas normally trades at above $2 during winter. But this year’s cold season has proven to be one of the most challenging for the heating fuel. Henry Hub’s front-month hit a 1998 low of $1.61 on Monday, as production remained overwhelming compared to the strong withdrawals of gas from storage over the past few weeks.
With the thawing weather, weekly draws of gas have also been thinning.
The U.S. Energy Information Administration’s gas storage report for last week, due at 10:30 AM ET (15:30) Thursday, is expected to show that utilities across the country pulled just 59 billion cubic feet from storage last week, versus the previous week’s drawdown of 109 bcf.
That compares with a decrease of 164 bcf during the same week a year ago and a five-year (2015-2019) average withdrawal of 99 bcf for the period.
If the estimated 59 bcf draw turns out to be correct, gas in storage would still be at 2.032 trillion cubic feet — almost 12% above the five-year average and about 63% higher than year-ago levels.
“There is plenty of gas in storage now, and no weather support as winter is nearly done,” said ICAP’s Shelton.
“Whatever fundamental strength that gas has over oil now is on paper. We need to see if that value can hold over time as we expect crude prices to be volatile too.”