With U.S. energy companies focusing more on crude oil production, natural gas prices and related exchange traded funds could burn brighter.
Goldman Sachs calculates that natural gas could trade between $5.75 and $6.5 per million British thermal units before enticing energy producers to switch over to natural gas production, reports Christine Buurma for Bloomberg.
NYMEX natural gas futures currently trade around $4.8.
Oil drillers switched to crude oil in 2012 when natural gas futures dipped to a decade low. Despite the spike in natural gas prices due to increased demand in an unexpectedly cold winter, crude oil remains the more profitable commodity. According to Baker Hughes data, the number of natural gas drilling rigs in the U.S. is at around a 21-year low.
“You need either $6 gas or oil at $70 a barrel for drilling to switch back to natural gas,” Salil Sharma, vice president and portfolio manager at Loomis, Sayles & Co., said in the article. “The industry has both the resources and the ability to fill the storage deficit. It’s just a question of at what price.”
West Texas Intermediate crude oil futures are currently trading around $103.7 per barrel.
“Gas looks a lot better than it did, but oil looks even better at $100,” Scott Hanold, an analyst at Royal Bank of Canada, said in the article. “Operators are getting pretty strong returns in most of the major oil plays. Without a sustained gas price at $4.50 or higher, producers don’t have enough confidence to put gas rigs back to work.” [More Upside for Energy ETFs]
Without a substantial increase in supply, natural gas inventory levels could rise to 3.422 trillion cubic feet by late October, or 11% short of last year’s levels for the same period, according to the Energy Information Agency.
Natural gas has been one of the best performing assets this year, with the United States Natural Gas Fund (NYSEArca: UNG) up 29.7% and iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ) up 29.8% year-to-date. [Natural Gas: Finally a Winning Bet]
United States Natural Gas Fund
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