Oil and gas futures prices are down mid-week, as inventory issues hold back both commodities, possibly for the long-term.
On the natural gas front, futures prices fell off early this week to their lowest levels in 30 days, as all indications show natural gas inventories are sufficient for the winter across the U.S. On the oil side, December crude oil futures slid, as well, to under $50 in New York Mercantile trading on Tuesday, as energy analysts from S&P Platts estimated a 4.8 million barrel increase in U.S. crude oil supplies last week. A "slight uptick in demand" did boost crude oil futures in Wednesday morning trading, according to Platts, a short-term trend that could also moderately boost natural gas prices, as analysts see "good buying" of Gulf Coast light naphtha for gasoline blending this week.
On the oil side, December crude oil futures slid, as well, to under $50 in New York Mercantile trading on Tuesday, as energy analysts from S&P Platts reported a 4.8 million-barrel increase in U.S. crude oil supplies last week. A "slight uptick in demand" did boost crude oil futures in Wednesday morning trading, according to Platts, a short-term trend that could also moderately boost natural gas prices, as analysts see "good buying" of Gulf Coast light naphtha for gasoline blending this week.
For the long-term, however, both oil and gas prices may face significant headwinds, as natural gas inventories leading to reduced demand this winter, and as reports that Iraq seems to be balking at the recent announcement by the Organization of the Petroleum Exporting Countries (OPEC) slow down oil production.
Consequently, commodities investors looking for direction on both oil and gas prices may have to settle for a meandering market for both energy sources going forward, experts contacted by TheStreet say.
"The only thing for sure is that oil and gas prices will go up and they will go down," says Shane Randolph, managing director at Opportune Consulting, in Denver.
Randolph says market fundamentals might indicate traction in a particular direction, but those indications can lead to "some confounding results."
"Whatever the current outlook in the market may be, a producer's decision to hedge should be rooted in understanding their cash flow requirements to meet debt payments, capital expenditure budgets, general and administrative costs and dividend expectations," Randolph explains.
"Additionally, OPEC's September 27 announcement of its plan to cut output has applied upward pressure on crude prices, but there is still some uncertainty around their ability to execute this plan, as Iraq seeks an exemption from these planned output cuts," he says. Randolph also points to continued speculation that Russia will refuse to join in the OPEC production limits deal.
On the natural gas front, gas inventories are currently "very high" with the latest report on October 14 at 3,836 Bcf, matching the record for this time of year, last set in 2012, adds Randolph. "However, there is still some room to go and with prompt NYMEX gas prices at around $2.80 and January and February contracts at around $3.35, there is plenty of incentive to keep injecting through the end of the month, so those who can inject will likely do so," Randolph says.
"That should force price spreads to contract going into November," he says.
Other energy industry observers wonder if the OPEC deal will ever get off the ground at all.
"There is considerable uncertainty as to whether OPEC will actually manage to find an agreement at their next meeting," says Jerome Taillard, assistant professor of finance at Babson College. "Several of its members -- including Iraq and Iran -- are seeking exemptions from the freeze -- or cut -- that is being proposed. Iraq, in particular, say the data on which production numbers are estimated is flawed. Tension is high and ever since November 2014, the group has not been able to coordinate. Thus, market participants are concerned that a coordinated action will not take place."
At the same time, shale production continues to show strong resilience, Taillard adds. "By focusing on the best acreage --including Permian, STACK, and SCOOP -- reducing costs and improving completion designs, some of the major shale drillers have been able to drill profitably even at $50 per barrel," he states.
Taillard also believes that natural gas went from a highly oversupplied market earlier in the year to reach more balanced inventory levels recently, primarily by seeing a drastic cut back in production. "Marcellus and Utica shale production will be severely constrained in its growth until more pipeline is built in and out of the region," he says. "There should be a flood of new production in 2018, which, unless countered by significantly increased demand in the U.S. or increased demand for exportation, will create significant headwinds for natural gas as of 2018."
For 2017, a $3 natural gas price range could be maintained, Taillard notes. "However, winter conditions will be critical," he says. "We are now entering the heating season. Cold weather will allow prices to hold on well but, as we saw last week, if milder weather sets in, prices will remain under pressure."