That's Schadenfreude! - Crude Oil's Misfortune Is Positive for Natural Gas; Or Is It?

Lower crude oil prices whack oil-directed drilling, slashing crude production, which cuts associated gas output, tightening the gas supply-demand balance, and boosting gas prices enough to spur more gas-directed drilling — it’s a classic case of commodity market schadenfreude, where one product benefits at the expense of another. That’s the way it was supposed to work, according to various trading strategies touted a few weeks back. But here we sit, with crude oil prices still around $40/bbl and gas prices languishing at a paltry $1.66/MMBtu. Was there something wrong with the schadenfreude thesis, or do we have to look deeper to understand how prices will behave in this convoluted COVID era? In today’s blog, we’ll explore this question and what it may mean for natural gas prices in the coming months.

To get a sense of what is ahead for natural gas, we first need to explore what is happening now, and it’s not pretty. The average annual price for natural gas so far in 2020 is about $1.80/MMBtu, lower than the annual average has been in the past 25 years. Figure 1 shows the more recent trend. Back in the good ole days of 2014, gas averaged $4.25/MMBtu, then fell with crude in 2015-16, and ratcheted back up to $3.00/MMBtu in 2017-18, before beginning its most recent fall from grace in 2019-20, as detailed in the monthly graph to the right in Figure 1.

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