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Oil And Gas Market Update

By Robert Rapier on April 4, 2017

First off, I wanted to mention that this week is Investing Daily’s Annual Wealth Summit in Alexandria, Virginia. I hope to see some of you there. Topical to today’s article I want to share one of the slides that I presented at last year’s summit. Note the last bullet point:

Natural gas slide from 2016 Wealth Summit

 

At present, the price of West Texas Intermediate (WTI) is 38% higher than it was a year ago and the spot price of natural gas is 63% higher than it was a year ago:

Commodity prices on April 3, 2017

Last year readers probably got tired of hearing me argue that natural gas was more undervalued than crude, but I think the past year clearly validated that position. Hopefully, you made a little money from that advice.

Natural gas prices have shown recent strength, rising back above $3 per million British thermal unit (MMBtu). The price had dipped to $2.50 in early March, but colder-than-normal temperatures during the month caused a spike in demand. More on that below.

On the topic of crude oil, after spending most of March under $50 a barrel (bbl), the price of West Texas Intermediate broke back above that mark last week. The catalyst seemed to be comments from OPEC that they are likely to extend production cuts when they meet in May. As I have previously stated, I think this is the most likely course of action. 

But you want to know what happens next, right? You can gain some insights into the direction of oil and gas prices from a pair of comprehensive reports released each week by the Energy Information Administration (EIA). Data of interest for the oil market can be found in the Weekly Petroleum Status Report, which is published each Wednesday. For natural gas, the Natural Gas Weekly Update comes out each Thursday. 

The following graphic from the most recent natural gas update demonstrates the reason gas prices recovered this winter from last winter’s lows. A combination of higher demand and lower production (a response to lower prices) brought gas inventories down from historic highs:

Natural gas in storage retreated from historic highs this past winter.

But the oil status report is where one can dig into the data. I did just that last month when there was a larger-than-expected build in U.S. crude oil production. In response to the news, WTI quickly dropped back down below $50/bbl. But the complete reading of the report showed 1). Finished product inventories (e.g., gasoline) fell by more than crude oil inventories rose (i.e., “total” inventories actually fell); 2). Refinery maintenance season was reaching a peak, and 3). Crude oil imports had been high for the week.

From these observations, and with WTI at $47/bbl, I issued several Buy alerts to subscribers of The Energy Strategist, arguing that the dip was a buying opportunity, and not the beginning of a slide back to below $40/bbl (as some were predicting). I also provided the same advice in this column in Where Oil Prices Are Headed. Early returns are promising, but we will know in a few months whether this was sound advice.

The short-term still hinges on OPEC’s actions at next month’s meeting, but I think they learned their lesson from their previous attempt to drive U.S. shale oil producers out of business. Nevertheless, as our recent presidential election showed, the unexpected can certainly happen. If it does, we will be ready.

Follow Robert Rapier on Twitter, LinkedIn, or Facebook.


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