Saudi Oil Attacks Could End Natural-Gas Rally

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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(END) Dow Jones Newswires

September 20, 2019 08:14 ET (12:14 GMT)

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