An oil well is seen near Denver, Colorado.  Picture: Reuters
An oil well is seen near Denver, Colorado. Picture: Reuters

New York — Opec’s decision to shrink oil production is both a blessing and a curse for natural gas markets.

It is bad news for the US gas bulls enjoying a rally that has propelled prices to the highest in two years. Crude explorers have more incentive to drill with oil futures surging on the promised cuts by oil cartel Opec. And with every barrel of oil they pull out of the ground, they will inevitably pull out gas, a byproduct that threatens to add to a US supply glut that is already hit a record.

"These guys will drill more, and you are going to get that extra gas at an inconvenient time," said Jason Schenker, president of Prestige Economics in Austin, Texas. "It’s bearish for US gas for the next three-to-nine-month window."

While the potential flood of so-called associated gas threatens to derail the rally in US gas prices, it also stands to be a boon for the liquefied natural gas (LNG) market. A large share of LNG contracts are linked to benchmark oil futures. And a drop in US gas prices will allow the nation’s LNG exporters to offer supplies to the world at a deeper discount.

In fact, Golar LNG, which owns floating LNG terminals, rallied as much as 16%. And while the company did report better than projected earnings on Wednesday, its rally "mostly has to do with oil prices", said Evercore ISI analyst Jonathan Chappell.

Cheniere Energy, which became the first exporter of US shale gas by tanker in February, jumped as much as 8.2% on Wednesday, reaching a six-week high.

"Any increased oil production in the US could limit further gains in natural gas prices, as it would probably increase oil-associated natural gas production, which accounts for about 20% of domestic supply," Michael Roomberg, who helps manage $7.5bn at Miller Howard Investments, said on Wednesday.

Schenker said the volumes of associated gas that could hit the market when oil explorers put rigs back to work could send gas prices back to the mid-$2 range.

Bloomberg

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