'There is some upside': Optimism in natural gas sector a result of oil industry's crisis
While record low oil prices are costing the vast majority of companies money on every barrel they produce, the natural gas sector is optimistic that 2020 could turn out to be a pretty good year.
In short, all of the problems plaguing the oil industry — including a sharp drop in fuel demand and OPEC countries flooding the market with oil — could mean higher prices for natural gas.
Much of the natural gas to hit the market in the U.S. is produced from oil wells. Companies pull oil from the ground, but some natural gas comes up with it.
As many oil companies are now cutting back on oil production, there will likely be much less natural gas on the market. That could mean higher prices.
"Most of us are still needing our homes heated and so on, so demand isn't down much," said Jonathan Wright, the chief executive of Calgary-based NuVista Energy.
About two-thirds of the company's production is natural gas, while the remainder is condensate, a very light type of oil.
Wright said he has "no joy at all" at seeing oil prices so low, but he's optimistic about what it will mean for his company.
"The oil price is going to take some time to recover, in my best estimate, and that means with less gas being produced with it, there is some upside to natural gas," he said.
Natural gas prices are likely to be volatile this summer, he said, as the repercussions of the COVID-19 virus have shifted demand for the energy source.
So far this year, natural gas in Western Canada has averaged about $2 per million British Thermal Units, although the price now sits at about $1.60.
Martin King, a Calgary-based commodities analyst with RBN Energy, expects the price to average about $1.90 for this year.
"For the summer and a good portion of the rest of the year, I think we could see respectable pricing for natural gas here in Canada and especially Western Canada," he said.
King said there is also plenty of storage space available north of the border.
"If we keep producing at a reasonable level and there is a pullback in demand or exports to the U.S., we do have a place to put the gas," he said.
Possible downside, too
Considering how long the pandemic may last and how unpredictable the impacts will be of the virus, there is some concern the natural gas sector won't be immune.
Rory Johnston, the managing director at Toronto-based market research firm Price Street, is cautious about predicting how the sector will perform for the rest of the year.
"There's a small silver lining there," he said of how reduced oil production should improve natural gas prices.
"Then again, you have such a demand drop in this. Power demand and commercial heating demand and other things that are all part of that COVID demand disruption story that are affecting oil," he said. "I think a lot of that could also batter natural gas."
