Why Natural Gas And Oil Won’t Diverge For Long

Natural gas remains a very different situation. There, declining US supplies in storage combined with record-setting cold and “blizzard cycle” conditions should have resulted in a spike in gas prices.

It certainly did so in the case of with thermal coal. The VanEck Vectors Coal ETF (KOL), for example, increased 6.2% over the past week and a very strong 14.8% for the month through close on Tuesday.

But not the case with natural gas. In what was to some a quite unexpected result produced a subdued monthly rise but a protracted decline during the very period in which tradition would prescribe that gas prices would spike.

Currently, the price of around $2.85 per 1,000 cubic feet (or million BTUs) is well below where most analysts (myself included) had expected gas to be at this point.

Without question, there will be a significant drawdown from stockpiles this week following the weather blast only now showing signs of abating on the East Coast. That will result in a rise in price.

Yet that increase does not appear to be sustainable as more seasonal weather hits.

Unlike previous periods, higher natural gas prices are no longer entirely dependent on abnormally cold winter weather. As we have discussed several times, there are additional gas usages coming in to play: exported liquified natural gas (LNG); replacement of coal in the generation of electricity; substitution for oil products as feeder stock for petrochemicals; rising industrial use; and the expansion of LNG, compressed natural gas (CNG), and hybrid vehicles.

Nonetheless, the expected improvement in prices has been slow to materialize.

And there are a few reasons for this…

Why Natural Gas Is Lagging – but Not for Long

The first reason has been the nature of natural gas production. Most of the expenses in drilling a gas well are front-loaded. Some 80% or more of the cost is laid out before anything comes up hole. The volume flow is the life line for return on investment and extends for years irrespective of market conditions.

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