WTI crude oil prices are back above $54/bbl for the first time since February, which is good news for many oil investors. But while crude oil prices have surged 15 percent in the past month, natural gas prices have fallen 5.8 percent in that time.
Bernstein analyst Jean Ann Salisbury recently explained why oil bulls and natural gas bulls may just be at odds in a recovering energy market. According to Salisbury, a ramp in crude oil production in response to rising oil prices will pump more associated gas into the market, limiting upside in gas prices.
“We believe that investors have not fully understood that gas and oil price should in many ways trade inversely with each other,” Salisbury wrote.
Which Commodity Wins?
Bernstein is bullish on oil and bearish on gas. The firm is calling for $50/bbl oil prices in 2018, $60/bbl in 2019 and $65/bbl in 2020. At the same time, Salisbury said natural gas prices will have a difficult time staying above $2.50/mbtu over the next three years.
On the other hand, if oil prices decline significantly to the $40/bbl range, she estimates that gas prices could have roughly 30 percent upside from current levels.
“Our view on gas is the following – demand will disappoint as increased Mexico exports and LNG exports are well below capacity, and remaining coal retirements do not provide that much incremental demand (as most of what's being retired is inefficient and running at low utilization anyway),” she wrote.
A Forgettable Year
So far in 2017, oil and gas investors have gotten hit hard, but natural gas investors have taken a harder hit based on the following year-to-date performances:
- United States Oil Fund LP (ETF) USO is down 7.1 percent.
- United States Natural Gas Fund, LP UNG is down 35.9 percent.
- VelocityShares 3X Inverse Natural Gas ETN linked to the S&P GSCI Natural Gas Index DGAZ is up 104.6 percent.
- VelocityShares 3x Inverse Crude Oil ETNs linked to the S&P GSCI Crude Oil Index ER DWT is down 10.1 percent.
- VelocityShares 3x Long Crude Oil ETNs linked to the S&P GSCI Crude Oil Index ER UWT is down 33.0 percent.
- VelocityShares 3X Long Natural Gas ETN linked to the S&P GSCI Natural Gas Index UGAZ is down 81.4 percent.
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