Saudi Oil Attacks Could End Natural-Gas Rally
September 20 2019 - 08:29AM
Dow Jones News
By Ryan Dezember
Natural-gas prices have recovered from their summer swoon, but
analysts and investors are skeptical that the gains will last,
particularly after the weekend attacks on Saudi oil facilities.
The concern is that increased drilling in such places as West
Texas and North Dakota by producers hoping to capitalize on higher
prices for crude and propane could pump a lot of extra gas into an
already-flooded market.
A decline in gas prices would be welcomed by U.S. factory
owners, power plants and households that use natural gas to make
chemicals, generate electricity and fuel furnaces. But it would add
pressure to producers already strained by unseasonably low summer
prices.
Natural gas for October delivery closed Thursday down 3.8% at
$2.538 per million British thermal units after the U.S. Energy
Information Administration reported a bigger injection of gas into
storage than expected.
Despite the drop, gas prices remain up 23% from a three-year low
of $2.07 reached on Aug. 5. Futures are priced roughly where they
were before the attacks Saturday hobbled the world's largest oil
exporter.
Oil prices surged 15% right after the attacks before paring
their increase to about 6% as Saudi Arabia said it would resume
full production within weeks. Analysts said that the attacks could
leave oil prices elevated even after full production is restored in
the kingdom, with investors anticipating the risk of future supply
disruptions in the Middle East.
"It's going to probably embolden U.S. oil producers to produce
more," said Ryan Kelley, who manages several stock portfolios at
Hennessy Funds, including one that is focused on gas buyers such as
utilities.
Goldman Sachs analysts warned clients this week that a sustained
increase in prices for crude or natural-gas liquids such as propane
-- produced heavily by Saudi Arabia and drillers in Appalachia --
might tempt U.S. companies to drill more.
Goldman forecasts an average gas price of $2.50 next year, but
said its estimate might prove high if oil drillers ramp up or gas
producers in the Northeast chase propane prices. "Appalachia
producers in particular need to show restraint in order to keep the
market balanced into 2020," the bank's analysts said in a research
note.
The market is already expecting a wave of added gas supply at
the start of autumn, when prices typically recede before demand
picks up in winter to fuel furnaces.
The Energy Information Administration estimated this week that
the amount of natural gas extracted from shale formations in
Appalachia, West Texas, Louisiana, North Dakota and on the Great
Plains will next month surpass records.
Kinder Morgan Inc., meanwhile, is expected in the coming days to
open its 500-mile Gulf Coast Express Pipeline, which stretches
across Texas between drilling fields in the Permian Basin and
Corpus Christi. The tube will deliver as much as two billion cubic
feet of gas daily to exporters, manufacturers and households. That
gas will come to market from a region where producers have been
burning off roughly enough each day to fuel every home in the state
because they haven't had anything else to do with it.
Unlike West Texas producers that unearth gas as a byproduct of
drilling for oil and aren't particularly sensitive to gas prices,
those operating in Pennsylvania, Ohio and West Virginia are
dependent on gas and have suffered from years of low prices.
Shares of Pittsburgh-based EQT Corp. have lost 56% over the past
year, and the company, the largest gas producer in the U.S., said
last week it would lay off about a quarter of its roughly 800
employees. Over the past year shares of Range Resources Corp. and
Antero Resources Corp. have fared even worse, falling 73% and 81%,
respectively.
Some are skeptical that these companies will be able to do much
to boost output soon even if they wished to. Besides the months
that it can take to plan, drill and complete a shale well, key
Appalachian producers have already spent much of the money they
have allocated to new wells in 2019 and have promised shareholders
restraint, said Matt Hagerty, an analyst at BTU Analytics.
"The most likely outcome is that producers will just take the
extra cash flow from higher prices and pay down debt, buy back
stock or pay a dividend," Mr. Hagerty said.
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Write to Ryan Dezember at ryan.dezember@wsj.com
(END) Dow Jones Newswires
September 20, 2019 08:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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