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Midweek Sector Update: Oil Gloom Spreading To Natural Gas Market

Midweek Sector Update: Oil Gloom Spreading To Natural Gas Market

The oil glut is having a knock on effect on natural gas drilling across the United States. The U.S., the largest natural gas producer in the world, is starting to see its gas boom come to an end. Natural gas prices have fallen by half within the past year, down below $2.90 per million Btu.

Much of that can be attributed to the record level of production in 2014, which brought welcome relief to northeastern states that dug out from a brutal winter and a spike in natural gas prices. Storage levels dropped to their lowest in years. While many analysts predicted similar price spikes for winter 2015, it wasn’t to be. The boom that occurred in 2014 allowed for storage levels to build up sufficiently so that this past winter didn’t raise any problems.

Now, with production still elevated, market watchers are raising questions about the opposite problem: too much supply. Storage levels are starting to build up, and could be well above the five-year average within just a few months. Prices are already extraordinary low, and more output would depress them even further. It seems the gloom from the oil markets is spreading to natural gas.

Related: New Silk Road Could Open Up Massive Investment Opportunities

On the other hand, the same dynamic that is rebalancing oil is also true for gas. Rig counts have declined along with prices. But importantly, a lot of natural gas is produced in association with oil, so when oil drillers cut back production, gas production will also fall. After all, the drillers of oil and gas tend to be the same people. In that sense, natural gas production will take a hit because of the oil glut.

What does that mean for the near future? Natural gas production, after years and years of production increases, may finally plateau and maybe even fall this year. The projections from various banks and market analysts are all over the map to be sure, but substantial leaps in production are probably a thing of the past.

Meanwhile, oil supplies could surge in the weeks ahead. As we close in on the final deadline for a deal over Iran’s nuclear program, Iran is laying the groundwork for a resurgence in oil exports. Reuters reports that Iran is storing at least 40 million barrels of crude oil onboard tankers floating at sea. Oil sitting in storage could be sold immediately after sanctions are lifted. At the OPEC meeting in early June Iran made it clear that it wants its fellow OPEC members to make room for Iranian oil returning to the market. OPEC did not touch its output quota, but Iran insists that it plans on revving up oil production as soon as it can.

Iran’s oil sitting in storage will add immediate supplies to the global market. From there, the Iranian government says that it will be able to ramp up production by an additional 500,000 barrels per day within a month of the removal of sanctions. But first things first – a nuclear deal actually needs to be signed by all the parties involved before any of this can take place. Related: The Front-Runners In Fusion Energy

Royal Dutch Shell (NYSE: RDS.A) managed to maneuver around the “kayaktivists” in Seattle’s harbor, as its Polar Pioneer rig departed for Alaska. The rig had been the target of the environmental movement, which sought to block it from leaving. But Shell appears undeterred. Shell also obtained a few more key permits that it needed before it can actually start drilling. On June 15, the company received a federal permit that allows it to disturb marine life in the Chukchi Sea, including whales and seals. It is still waiting on one permit from the Fish and Wildlife Service and two from the Bureau of Safety and Environmental Enforcement. Within a few weeks Shell will be poised to restart its drilling campaign in the Arctic after several years on the sidelines.

Oil prices continue to trade at relatively stable levels, with WTI bouncing a little above and below the $60 per barrel mark, and Brent trading just below $64 per barrel. With the markets moving past the OPEC meeting, traders have turned their eyes back towards the ongoing surplus in supplies. That has prevented oil from breaking through the low $60s per-barrel-threshold that it has repeatedly flirted with.

This week several factors are affecting the price. First, the possibility of a Greek default is casting a (relatively small) shadow on global equity markets. Greece does not have a huge economy and the Euro Zone is not as vulnerable to a Greek default as it was a few years ago. Still, sovereign defaults are never a good thing. But that also has a related effect on the strength of the dollar. In times of economic turmoil, the dollar provides a safe haven. However, a strengthening dollar weighs down oil prices – since oil is traded in dollars, a stronger dollar makes oil relatively more expensive. In this way, the Greek crisis is dragging on oil prices a bit this week. Related: Is Elon Musk Just A Billionaire Welfare King?

Yet another short-term variable affecting the price of oil is global interest rates. The U.S. Federal Reserve is meeting this week and will offer clues as to its plans to raise interest rates at the conclusion of its meeting on June 17. The markets are already expecting an interest rate hike later this year, but if the Fed announces anything that alters that calculus, it will affect oil prices. A quicker or stronger than expected increase in interest rates will send oil prices down a bit, while a looser policy will push up prices. Keep an eye on that.

The IEA released a landmark report on global greenhouse gas emissions on June 15, which offered a “bridge” plan to reduce carbon pollution. The report was meant to set the stage for the climate negotiations in Paris in December, and the IEA offered several recommendations that would allow the world to achieve “peak emissions” by the end of this decade. The agency called on governments to enact policies in five key areas: energy efficiency, reduce coal consumption, more investment in renewables, phase-out of fossil fuel subsidies, and reductions in methane emissions from oil and gas production. The IEA also notably predicted that renewable energy could become the largest source of electricity generation by 2030, moving past coal, natural gas, and nuclear power.

By Evan Kelly Of Oilprice.com

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