(Reuters) - It took a 20% selloff in the crude oil market for the outlook to pick up for U.S. natural gas prices.
U.S. natural gas bucked the rest of the energy sector on Monday, rising as much as 7% even as oil prices suffered their worst day since the 1991 Gulf War due as a price war erupted between Saudi Arabia and Russia that threatens to overwhelm markets with supply.
The reason is something of a paradox. In recent months, natural gas prices have suffered because oil producers, who were profiting from strong worldwide demand for crude, also produce a ton of what’s known as associated gas - natural gas that is a by-product of the crude output.
However, those producers do not want the gas, and the oversupply has persisted for at least two years. The U.S. Energy Information Administration projected U.S. gas production in 2020 would top last year’s all-time highs - even with prices expected to fall to their lowest level since 1999.
But after Monday, analysts think the drop in oil could cause producers to cut spending on new drilling, close rigs and trim production - and with that, cut gas output as well.
While most energy firms were crushed Monday, several U.S. companies that produce lots of gas saw their shares rocket including EQT Corp up 10%, Cabot Oil & Gas Corp up 3%, Southwestern Energy Corp up 17% and CNX Resources Corp up 8%.
“One of the biggest issues adversely affecting natural gas producers is that they cannot even control their own supply,” Stewart Glickman, head of the Energy sector team at CFRA Research said in a note.
Much of the growth in U.S. gas output in recent years has come from gas associated with shale production in basins like the Permian in West Texas and eastern New Mexico.
Normally, low prices encourage energy firms to cut spending on new drilling and reduce production, but that is not the case when gas is a byproduct of oil production.
“(Gas) prices at the Waha Hub in the Permian ... could find some relief if reduced drilling significantly slows down associated gas production this year,” Daniel Myers, market analyst at Gelber & Associates in Houston, said in a report.
Reporting by Scott DiSavino