OPEC or the Organization of the Petroleum Exporting Countries – the international cartel of oil producers – and its allies are scheduled to meet at its headquarters in Vienna, Austria today. As usual, the outcome of the gathering of the group's 15-member countries from the Middle East, Africa and Latin America, and several other major producers, including Russia, is expected to have far-reaching implications for all involved in the oil trade – from retail stations to budgets of oil-dependent nations.
The meeting is aimed to discuss production strategy but assumes greater significance in the backdrop of oil prices recently sliding to their lowest in more than a year and Washington’s piling pressure to stop them from climbing.
But apart from crude oil, the OPEC summit also seem to have added a twist to the future direction of natural gas prices. This shouldn’t come as a surprise though, considering that associated gas from shale oil drillers constitute a major portion of the fuel's new production in the United States.
Natural Gas Surges 41% in November
Natural gas, which is used by consumers to heat their homes in winter, has climbed to four-year highs recently. Prices are up around 55% since the start of the year and soared 41% last month, making it the market’s best-performing commodity of November.
Natural gas recently broke the $4 per MMBtu mark for the first time since November 2014 with cooler weather conditions resulting in strong demand for the heating fuel. Despite skyrocketing production, natural gas entered the winter season with stockpiles at their lowest in 15 years. At 3.054 trillion cubic feet (Tcf), current natural gas inventories are 720 Bcf (19.1%) under the five-year average and 644 Bcf (17.4%) below the year-ago figure.
Having hit a four-year high of $4.837 per MMBtu recently, there is potential for further price gains with bulk of the winter heating season still to come.
How Will the OPEC Meeting Affect Gas Prices?
Odds are in favor of an oil production cut at the OPEC meeting. The cartel members and Russia are expected to commit to cutting output by 1 million-1.4 million barrels per day from October levels in an attempt to drain inventories and crude boost prices. Such an arrangement might probably prop up oil prices but as a consequence jump-start more shale drilling in the United States.
Often being a byproduct of oil production, more drilling by the shale industry will also lead to higher natural gas volumes. For example, there is a backlog of more than 3,600 drilled but uncompleted wells in the Permian Basin – mainly reflecting pipeline bottlenecks out of the region – that can be brought online pretty quickly once the operators sense higher oil prices in the offing. As it is, natural gas production from the Marcellus and Utica shale regions continue unabated. In fact, dry gas output in the United States averaged 88.5 Bcf per day per EIA's recent weekly report, up approximately 12.5% from the year-ago level.
To conclude, sustained higher oil prices could see natural gas production increase further, and hence limit its impressive rally.
On the contrary, an OPEC stand against the production cut could send WTI prices to around $40 per barrel and drive down domestic shale production. While many operators have repositioned themselves to adapt to the new $50 oil reality and even thrive at those prices, a sub-$50 might discourage more production from U.S. shale companies. This, in turn, will limit the volume of associated natural gas output and aid the commodity’s nascent rally.
Strike While the Iron Is Hot
Meanwhile, strong natural gas prices augur well for upstream companies like Gulfport Energy Corporation (GPOR - Free Report) , Antero Resources (AR - Free Report) , Cabot Oil & Gas Corporation (COG - Free Report) , QEP Resources Inc. (QEP - Free Report) and SilverBow Resources, Inc. (SBOW - Free Report) . Moreover, each of these firms has a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy), which means that they are expected to offer substantial upside potential from the current price levels.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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