U.S. Natural Gas Futures Rise as Oil Slump Triggers Output Worries
(Reuters) — U.S. natural gas futures settled higher on Monday, after sliding as much as 8.8% earlier, on expectations associated gas production will decline as drillers shut oil wells in shale basins in response to turmoil in the crude market.
One day ahead of the expiry date, front-month gas futures for May delivery on the New York Mercantile Exchange rose 7.3 cents, or 4.2%, to settle at $1.819 per million British thermal units (mmbtu).
"The upward price movement reflects market's concern about possible tightening of gas supply in the future. All stems from the recent historical oil market developments and the implication on associated gas production," said Zhen Zhu, economist at Oklahoma City-based C.H. Guernsey.
Brent crude fell below $20 a barrel and U.S. crude plunged 27% on Monday, driven lower by skittish investors fleeing the U.S. benchmark due to lack of available storage resulting from the coronavirus-induced collapse in demand.
Natural gas prices had earlier dropped to their lowest since April 16 at $1.593 mmbtu on demand concerns, but later reversed course on expectations production will decline as drillers shut oil wells in shale basins due to the collapse of U.S. crude prices. Analysts note that what is bad for oil is good for gas because those oil wells also produce a lot of gas.
The total number of oil and gas rigs active in the United States was down 64 to 465 last week, closing in on the all-time low of 404 rigs during the week ended May 20, 2016, according to Baker Hughes data going back to 1940.
"On one side, the COVID-19 certainly has reduced gas demand even though the specific amount of impact is unknown. On the other side, summer weather will be a key factor determining the demand ... Given these fundamental factors, I think the market may have reached a point where it lacks strength to go north further," Zhu said.
Gas output in the Lower 48 states fell to a 11-week low of 91.7 bcfd on Thursday, and stood at 92.0 bcfd on Sunday, according to data provider Refinitiv.
Demand in the Lower 48 states, including exports, is expected to decline as the weather turns milder, falling from 87 bcfd this week to 84.8 bcfd next, according to Refinitiv.
Looking ahead, gas futures for the balance of 2020 and calendar 2021 were trading higher than the front-month on expectations demand will jump as the economy snaps back once governments loosen travel and work restrictions.
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