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Natural gas is produced as a byproduct of oil drilling, but drilling has declined as the pandemic hit energy demand.
Spencer Platt/Getty Images
Natural-gas prices have risen 26% in the past year, but there is another big surge coming, according to analyst Jordan McNiven at Tudor Pickering Holt & Co.
Gas prices tend to fluctuate in response to the weather, and on changes in supply and demand. Things are looking up in both areas, McNiven wrote.
On Tuesday, gas futures at Henry Hub, the dominant U.S. price, were up 3.2% to $2.83 per million British Thermal Units. McNiven expects them to rise to $3.25 in the second half of the year and $3.50 by next winter.
The largest market factor for now is a shortage of liquefied natural gas (LNG), which can be transported by ship. Asia doesn’t make much of its own natural gas, so it needs to import the liquefied version. And this year, demand for gas is soaring because the weather has been unusually cold. there
There aren’t enough ships, however, to supply all the demand, so rates to rent tankers have tripled in the past month. And in some parts of the world, bottlenecks have contributed to the shortage. Shipping through the Panama Canal, an important passageway for natural gas, has been delayed in recent months because of high demand and new Covid-19 restrictions.
All this should cause prices to rise even more. McNiven notes that the high Asian demand has led to less gas going to Europe, which is having to use gas it had placed in storage. Demand for U.S. gas is likely to keep rising, leading to high utilization at the American plants where the fuel is processed for transport.
Natural gas has been oversupplied in the U.S. over the past decade, because gas is produced as a byproduct of oil drilling — and oil drilling more than doubled during the shale revolution.
But with oil drilling slowing down because gasoline demand took a hit during the pandemic, gas supply has also declined. Prices could rise so much that power plants go back to using coal, McNiven writes. That would be a stunning shift after plant owners had spent years shifting in the other direction.
Analysts at Tudor Pickering upgraded several stocks too. Among the names that they upgraded to Buy are
Range Resources
(ticker: RRC),
Southwestern Energy
(SWN),
Antero Resources
(AR),
Advantage Oil & Gas
(AAV), and
Birchcliff Energy
(BIR).
Write to Avi Salzman at avi.salzman@barrons.com