Why Natural Gas And Oil Won’t Diverge For Long

Second, the U.S. has significant (and relatively easily extractable) unconventional (shale and tight) reserves. Any decline in overall market supply will be quickly replaced by new extraction.

Third, capping a gas well is more problematic than capping an oil well. That means an operator facing a likely reduction in prices because of excess supply already in the market will nonetheless continue pumping.

Finally, the real reason prices have not increased is the long side of the futures contracts (i.e., those betting that the price will rise) has disappeared. In the absence of any forward-moving pressure, prices will stagnate or decline.

In fact, the most probable move this week is one pushing prices lower as shorts (i.e., those contracts making money if the price retreats) once again take over. There will be a sizable decline in gas in storage, but that will only dampen the move down.

We are left then with a very unusual dynamic. My estimates of where crude oil will be at the end of first quarter 2018 (WTI $61-$62; Brent $$63-$65) have already been met or exceeded. Natural gas, on the other hand, continues to languish.

However, as I outlined in my 2018 Energy Forecast, I still anticipate Henry Hub to reach $3.50 by the end of summer. That’s up more than 20% from current levels.

As short bets fade out of view and production winds down, natural gas prices will have nowhere to go but up.

I’ll be back soon with an update on natural gas – and how we can position ourselves for profits.

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