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On Friday, crude oil futures witnessed their fifth consecutive rise, recuperating from the previous week’s setbacks, while U.S. natural gas reported its fifth straight day of decline, hitting its lowest point since September 2020.
The escalating tensions in the Middle East due to Israel’s new air strikes in Gaza, compounded with weakening hopes for an immediate ceasefire, have contributed to a 3% surge in crude oil, adding to the gains from the preceding session. This rise was further supported by tightening product supplies in the U.S. and globally.
As Israel launched new air strikes in Gaza, hopes for a ceasefire in the region faded, emphasizing the level of sensitivity the oil market holds to Middle East developments. As a Forex.com analyst, Fawad Razaqzada, eloquently highlighted: “Oil prices remain quite sensitive to the developments in the Middle East, and it appears as though nothing else matters too much.”
Front-month Nymex crude (CL1:COM) for March delivery settled at a +0.8% increase on Friday, reaching $76.84/bbl, while front-month April Brent crude (CO1:COM) closed at a +0.7% rise to $82.19/bbl. Both benchmarks soared by 6.3% for the week.
Meanwhile, front-month March Nymex natural gas (NG1:COM) concluded Friday with a -3.6% deficit, landing at $1.847/MMBtu and plummeting by 11.1% throughout the week. This marks the lowest settlement value since September 22, 2020.
Analysts have attributed the slump in U.S. natural gas prices to an accumulation of approximately 15% above-normal inventory levels for this time of year. The combination of near-record production, warmer than average weather, and a reduction in heating demand, exceptionally, apart from the mid-January freeze, has allowed utilities to retain more gas in storage.
A decline in natural gas prices usually prompts power generators to favor gas over coal and impels producers to reduce gas drilling. However, with the reduction of dozens of coal plants in recent years, there’s now a scarcity of coal available to replace.
From the production perspective, any reduction in gas drilling is likely to be counterbalanced by the augmented production of associated gas from oil wells, as energy companies intensify their drilling for oil wells amidst a 7% rise in crude prices year-to-date.
The drop in natural gas prices has led to a spike in the oil-to-gas ratio, reaching its highest levels since May 2012. On an energy equivalent basis, oil should, in fact, trade at only about a 6x premium over gas, highlighting the severe disparity.
According to the U.S. Energy Information Administration (EIA), gas production is anticipated to escalate to 104.37 billion cf/day in 2024 and 106.46 billion cf/day in 2025, from a record 103.75 billion cf/day in 2023.
The EIA projects that gas output in the largest shale gas producing basins will observe a meager 2% year-over-year (Y/Y) increase through the end of February in Appalachia, and a 3% decrease in the Haynesville area. However, gas output in the Permian and Bakken shale oil producing basins is predicted to have surged by 12% and 13%, respectively, over the past year.
As indicated by the Energy Select Sector SPDR (XLE), oil and gas equities concluded the week with a -0.2% fall.
Notable performance in energy and natural resources over the past 5 days include Brooge Holdings (BROG) with a +20.9% increase, Green Plains (GPRE) with a +20.7% surge, and Foremost Lithium (FMST) with a +20.2% rise. On the other hand, Atlas Lithium (ATLX) experienced a -14.5% decline, Nuscale Power (SMR) went down by -14.3%, and Sigma Lithium (SGML) witnessed a -13.1% fall.
Source: Barchart.com
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