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Jun 02, 2020 PRINT EDITION
Business

US natural gas futures edge up on decline of oil output

US natural gas futures edged up on Friday on expectations the plunge in oil prices earlier in the week would cause oil and its associated gas production to drop, allowing demand to absorb much of the gas oversupply that has built up in recent years.

March 17, 2020

US natural gas futures edged up on Friday on expectations the plunge in oil prices earlier in the week would cause oil and its associated gas production to drop, allowing demand to absorb much of the gas oversupply that has built up in recent years.
US energy firms responded quickly to falling oil prices, which lost a third of their value this week, by announcing plans to slash spending on new drilling that were even bigger than what they had already said they would cut.
US financial services firm Cowen & Co said the independent exploration and production firms it tracks have released plans to cut spending on new drilling by 17% in 2020. That is up from planned spending cuts of 11% before the oil price drop and compares with cuts of 11% in 2019 from 2018's levels.
Analysts said a drop in US crude output would cut the amount of gas produced in association with oil drilling in shale basins like the Permian in West Texas. Much of the growth in gas output over the past several years has come from associated gas.
Front-month gas futures for April delivery on the New York Mercantile Exchange rose 2.8 cents, or 1.5%, to settle at $1.869 per million British thermal units (mmBtu). For the week, the front-month was on track to rise over 10%, its biggest weekly increase since November.
Looking ahead, futures for calendar 2021 were on track to rise over calendar 2022 for the first time since January. Despite this week's gains, gas prices were still down about 36% since hitting an eight-month high of $2.905 per mmBtu in early November because near-record production and mild winter weather enabled utilities to leave more gas in storage, making fuel shortages and price spikes unlikely.
With all the price swings this week, implied volatility for gas futures soared 65% to its highest since late February. Oil prices, meanwhile, were on track for their worst week since the 2008 global financial crisis after the coronavirus outbreak rocked the world economy while top exporter Saudi Arabia and its allies stepped up plans to flood the market with record levels of supply.
Data provider Refinitiv projected gas demand in the US Lower 48 states, including exports, would rise from an average of 101.5 billion cubic feet per day (bcfd) this week to 104.3 bcfd next week before sliding to 103.8 bcfd in two weeks. That is similar to Refinitiv's forecasts on Thursday.
The amount of gas flowing to US LNG export plants was on track to rise to 8.8 bcfd on Friday from 8.2 bcfd on Thursday, according to preliminary data from Refinitiv.

Copyright Reuters, 2020