Natural Gas Price Fundamental Weekly Forecast – Lower Production Could Provide Short-Term Support

Natural gas traders are going to be paying close attention to the response from oil traders this week now that OPEC+ has agreed to cut production by 9.7 million barrels until the end of June. The reason is that steep production cuts especially in the U.S. could benefit natural gas.

If crude oil traders believe the production cuts are not enough to stabilize the market and prices continue to weaken “the long-term ramifications may not be all doom and gloom for natural gas, especially in the Permian Basin,” according to Natural Gas Intelligence.

“With WTI prices now in the low $30s, there aren’t too many plays in the Lower 48 that are now economic,” said NGI’s Patrick Rau, director of Strategy & Research.

Additionally, NGI also reported that Enverus analysts said price action would put most crude-focused areas in the Lower 48 out of the economic window for operators to drill, without hedges in place. “Should the market see these prices for an extended period of time, it could ultimately prop up gas prices as associated gas production would likely decline.”

We’re not saying it’s a given that gas prices will rise if oil production comes to a halt, but it certainly makes sense that gas supply could fall, helping to lift some of the storage burden. Ultimately, it all comes down to how the market responds to the demand destruction caused by the coronavirus pandemic.

Production Figures Starting to Show Impact Extremely Low Prices

Late last week, Genscape Inc. noted that daily production prints have been posting notable declines and while the firm can pinpoint “a good portion” of the drops to maintenance in certain regions, some of the declines are likely reactions to the rapid collapse of prices.

NGI reported that Genscape’s top-day estimate of Lower 48 production last Wednesday showed a 1 Bcf/d-plus day/day drop, having sunk slightly below 91 Bcf/d. While the estimate was likely to get revised higher, “at the moment, it marks the lowest single day of production since early February, when freeze-offs whacked more than 1 Bcf/d offline,” Genscape senior natural gas analyst Rick Margolin said.

Weekly Forecast

Cold weather in key demand areas and the possibility of lower production could be supportive this week, but just like last week, whether any rally can be sustained will be determined by the U.S. storage report.

Our support this week comes in at $1.719 to $1.673. If this area can hold then counter-trend buyers may try to build a support base.

Last week’s high was $1.918. Taking this level out will be impressive, but don’t expect a really strong short-covering rally unless buyers can overcome $1.959. This may be the trigger point that accelerates the rally into the early March top at $2.044.