So far this week, natural gas prices have risen 2.1%. On September 16, natural gas prices declined 0.5% and settled at $2.668 per MMBtu (million British thermal units).
Notably, US crude oil prices rose 14.7% on September 16 due to the drone attacks on Saudi Arabia’s oil facilities. These attacks reduced the kingdom’s oil production by 5.7 MMbpd (million barrels per day). A spike in oil prices might have helped natural gas gain 2.6%.
The bullishness in energy commodities pushed Chesapeake Energy (CHK) up 15.7% at the start of the week. CHK operates with a production mix of 69% in natural gas. The United States Natural Gas Fund LP (UNG) rose 2.4% on September 16.
The Saudi factor and gas prices
A spike in oil prices could bring more trouble for gas prices. If oil prices stay higher, US shale oil producers might increase their oil production. As natural gas is one of the results of US shale oil production, a rise in oil production could boost natural gas production to a new high.
This trend is a negative development for Henry Hub gas prices. In March 2016, natural gas prices fell to a 17-year low. A rise in the US shale oil output was one of the important reasons behind the fall in natural gas prices.
Since 2008, natural gas marketed production has risen 66.7%. The natural gas rig count declined 90.5% during this period. However, the oil rig count rose 131.9%. The rise in the oil rig count pushed production higher. Natural gas prices declined 66% due to robust production.
On September 16, the EIA released the Drilling Productivity Report. Based on this report, natural gas production from the seven major shale regions is expected to rise 5.7% in October on a month-over-month basis. Year-over-year, natural gas production could rise by 12.7%.
Inventory and natural gas prices
On September 19, the EIA plans to report natural gas inventories for the week ended September 13. Reuters analysts expect a rise of 78 Bcf (billion cubic feet) in natural gas inventories.
If the EIA data is in line with Reuters’ estimated figures, then the negative inventories spread could expand. This trend could support natural gas prices. The inventories spread is the difference between natural gas inventories and their five-year average. Often, natural gas prices are inversely related to the inventories spread.
The inventories spread is also important for energy stocks. In the week ended September 6, the negative inventories spread contracted by 20 basis points, based on the September 12 EIA report.
Between September 12 and September 17, natural gas prices rose 2.1%. However, natural gas–weighted stocks Chesapeake Energy (CHK) and Cabot Oil and Gas (COG) fell 1.1% and 1.6%, respectively. CHK and COG underperformed their peers. The contraction in natural gas inventories spread might have dragged these energy stocks down. COG operates with a production mix of 100% natural gas.
Sentiments and forward curve
On September 17, natural gas October 2019 futures settled 20 cents above (or at a premium to) October 2020 futures. On October 10, this premium was 13 cents. In this period, natural gas active futures rose 3.4%. Often, a rise in premium is followed by a rise in prices, which indicates that bullish sentiments are rising for natural gas.
Natural gas active futures between October 2019 and January 2020 settled in ascending order. This is a negative development for ETFs that follow natural gas prices such as the United States Natural Gas Fund LP (UNG). Based on the fund’s objective, UNG could incur losses when it shifts its holdings from the front-month futures (October) to the next-month futures (November).