Is The Natural Gas Rally Sustainable?

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The year 2018 seems to have begun on a great note for the commodity markets. On the one hand, crude oil prices touched $70 per barrel after almost two years of downturn due to the extension of the production cuts by the Organization of Petroleum Exporting Countries (OPEC) and their allies. On the other hand, natural gas prices have surged to over $6 per Mcf due to the unexpectedly cold winter experienced in the US earlier this month.

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Unlike weather predictions made in the last quarter, the winters in the US have turned out to be colder-than-expected, causing the demand for natural gas to shoot up. As a result, the inventory levels in the natural gas market, which was considered to be oversupplied due to the growing shale production in the US and lack of transportation and storage facilities (Read: How Will The Rising Natural Gas Output Impact The Ongoing Commodity Slump?), have come down, causing a spike in gas prices in the early weeks of this month.

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That said, we believe that the recovery in oil prices is sustainable at least for the next couple of months, while the sudden rise in gas prices appears to be a seasonal phenomenon. This is because as the OPEC and its allies continue to restrict their oil output over the coming months, oil prices are anticipated to go up. This would encourage US shale producers to accelerate their oil production in order to leverage the improving oil prices. However, this would also lead to a jump in the natural gas supply, since it is a byproduct of oil drilling.

Given that there is a shortage of pipeline and storage facilities to transport and/or accommodate the growing gas output, we believe once the winter season subsides, the problem of excess supply of gas will resurface, causing the gas prices to drop again. Thus, keeping all these factors in mind, we present below our forecast for natural gas prices over the next few years. This forecast is based on the close correlation between crude oil and natural gas prices.

You can create your own scenarios about the global oil demand and supply expectations and visualize its impact on our crude oil and natural gas forecast using our interactive platform.

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