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Supply-side crunch impacts oil, natural gas prices

Commodity prices recorded a strong week despite falling almost 1 percent Friday amid concerns about increasing Russian oil sales and a strengthening dollar.

West Texas Intermediate on the New York Mercantile Exchange rose three of five trading days, including a $2.15 surge Wednesday, and were unchanged Thursday before dropping 64 cents Friday to close at $71.97 per barrel. Prices rose over 3 percent for the week.

Natural gas prices on the NYMEX climbed above the $5 per Mcf level with a 29-cent surge Monday and stayed there all week, even with Friday’s 23-cent drop that saw prices close at $5.10 per Mcf.

“It’s been volatile,” Javier Loya, chairman and co-chief executive officer of OTC Global Holdings, the world’s largest independent interdealer broker of commodities, told the Reporter-Telegram in a telephone interview.

Campbell Faulkner, vice president and chief data analyst at OTC Global, said inventory has been supporting price levels, saying there’s enough drawdown in US inventories and not significant amounts of new production being added because rig activity remains relatively muted.

“This looks more like a supply-side crunch,” he said. “We don’t have an ocean of crude like we did three years ago. Prices aren’t $110 but they’re not $10; they’re at a sweet spot where producers are reasonably happy. Refined products are up but they’re not onerous.”

Operators have been busy cleaning up their balance sheets and remain reluctant to invest in more drilling, Faulkner added. He said they’re waiting to see if they have the cash flow to fund drilling and may increase activity if prices reach $80 or $90 a barrel.

He expects prices to hover in a range of $65 to $80 based on reasonably strong demand and a lack of incentive for the Organization of Petroleum Exporting Countries and its allies, or even in North America, to bring he called an ocean of oil onto the market.

Loya said he hasn’t seen any traders with $100 options. “While slightly bullish short-term, until the demand side of the puzzle becomes clearer, we’re not seeing the trading volume like with natural gas.”

Supply issues for natural gas could send prices to $10 per Mcf, Loya said. He explained that natural gas inventory is significantly under five-year averages, even in Europe. And any event, like Hurricanes Ida and Nicholas that disrupt natural gas production, even small amounts, are enough to give the market momentum.

Combined with the heat of summer drawing down storage and “We can’t inject enough not storage to be comfortable for the winter,” said Loya, “We could see spikes of $7 to $8 per Mcf.” He forecast prices will average around $3.70 per Mcf in 2022.

“It’s going to take awhile for us to get comfortable with the balance on storage,” he said. “You better get used to $3+ for awhile.”

Faulkner noted that natural gas is shifting from primarily a domestic commodity to an international commodity, pointing to the rise in exports to Mexico and efforts to export US natural gas to Europe and Asia. That is putting pressure on the domestic market, he said.

Higher prices are making dry gas-centric basins like the Haynesville attractive again, with producers like Chesapeake Energy tentatively expanding into the play. In the Permian Basin, he said Apache Corp,’s big bet on its Alpine High discovery could finally begin to pay off if interest in dry natural gas remains strong.

Then, Faulkner added, producers could again bump into the issue of stranded gas as takeaway capacity to Mexico or Corpus Christi or Houston again becomes constrained.

Summed up Loya, “It will be an interesting fourth quarter and winter.”

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2021-09-17 20:42:47

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