Natural gas price faces pressure from oil production

Oil prices have had a strong eight months, and natural gas prices have gained ground because of unusually cold weather so far this year. But the fuels are unlikely to both increase over the next several months.

Oil prices have surged to the point where drilling is likely to increase. We’ll find out more over the next month as companies report 2017 earnings and 2018 budgets, but all indications are that the fourth quarter was strong for the industry and activity likely will grow.

The Federal Reserve Branch of Kansas City last week reported its quarterly energy survey, in which respondents said they would consider “significantly increasing” drilling at $62 oil. The price has been above that level for much of the past two weeks and closed at $63.95 a barrel on Thursday.

Natural gas prices also are up a bit, but that movement has been mostly driven by weather and is unlikely to continue — especially if oil drilling ramps up, said Eric Fell, senior natural gas analyst with Genscape.

“Liquids prices are as important to the production of natural gas today as they ever have been,” he said. “We are predicting significant production growth. As prices rally, we get more rigs.

“All else being equal, increased oil prices are bearish for natural gas, and vice versa,” he said.

The benchmark natural gas price fell 4 cents, or 1.3 percent, Thursday to $3.19 per thousand cubic feet. While natural gas supply has ballooned in recent years, demand also has grown, largely because of increased use in power generation and industrial uses, and from exports.

Storage levels also have increased.

“We have an ability to enter the winter with more gas in the ground than we used to,” he said. “We have the ability to absorb shocks, whether bullish or bearish relative to weather or supply shocks like hurricanes.”

Storage levels were about 3.9 trillion cubic feet at the beginning of the current winter season. Five years ago, the capacity was about 3.6 trillion cubic feet. The county also has additional price shock absorbers in the ability for utility and industrial users to switch fuels and for exporters to slow or stop their efforts.

As a result, the mediumand long-term price of natural gas has been relatively stable, hovering between $2.80 and $3.20 per thousand cubic feet for much of the past 18 months.

Immediate-term prices, however, have been more volatile.

Prices in Oklahoma and Louisiana jumped to more than $6 per thousand cubic feet during the first week of January, leading electric utilities to buy more coal-fired power and leading liquefied natural gas exporter Cheniere to temporarily reverse course, selling its collected natural gas back into the U.S. market instead of shipping it overseas.

In New York, spot prices for immediate delivery surged to $175 per thousand cubic feet, leading utilities and industrial users to switch to fuel oil.

“Within the power stack, even though overall gas generation was rising and the overall electric load was going up, alternative forms of generation were ramping up hard, reducing what the gas generation demand would have been if we hadn’t had those prices,” Fell said.

For producers, however, the response to price changes is much slower.

“It takes at least three months for a move in price to impact rigs,” Fell said. “Then it takes another three to six months for a rig to add production. So you have a six-month-to-one-year lag between price impact and production.”