🤯 Have you seen our AI stock pickers’ 2024 results? 84.62%! Grab November’s list now.Pick Stocks with AI

Natural Gas Hits Monumental Level

Published 03/30/2020, 01:41 PM
US500
-
CL
-
NG
-
UNG
-
XLE
-

Long before the price of oil fell to its lowest level since 2002 or natural gas to its lowest since way back in 1995, the shares of producing companies in the oil and gas arena were flashing a warning signal.

The number of cases of Coronavirus continued to mount last week, and markets are exhibiting the most extreme risk-off volatility since the 1930s. One of the victims of the global pandemic was the bull market in stocks. When the price of an asset drops by 20%, it tends to enter a bear market. The leading indices in the stock market fell by more than 35% at the recent low. It seems like ages ago when stocks were making new highs on almost a daily basis, but the last new high came on Feb. 20, barely over one month ago.

Oil and gas companies did not participate in the bull market in stocks in 2019 and into 2020. When the market collapsed, they did worse. OPEC and Russia addressed demand destruction on the back of Coronavirus by flooding the world with crude oil. We are now in a world of unprecedented central bank stimulus, and government bailouts as scientists scramble for treatments and a vaccine to save lives. When it comes to energy production in the U.S., the government will decide if the business is a national security issue or if it is time to relegate hydrocarbons to the history books. The United States Natural Gas Fund, LP (NYSE:UNG) moves higher and lower with the price of the energy commodity. The price recently dropped to its lowest level in a quarter of a century.

25-Year Lows

On Monday, March 23, natural gas futures fell to yet another lower low in a continuation of the bearish trend that started in November 2019.

(Source: CQG)

The quarterly chart highlights that the price of the nearby natural gas futures contract hit its most recent low of $1.519 per MMBtu on March 23. The price fell to the lowest level since 1995 when natural gas moved to $1.335 during the third quarter and $1.25 per MMBtu at the start of the year. The nearby futures contract settled below the $1.70 level at the end of last week after another anemic bounce.

Producers On The Edge

The price action in the natural gas futures arena since November 2019 has been a problem for companies that extract the energy commodity from the crust of the earth. Moreover, low interest rates since the 2008 financial crisis have encouraged both oil and gas companies to carry significant levels of debt on their balance sheets.

A sign that energy producers were feeling financial strains was that the shares of companies in the sector lagged the stock market throughout 2019 and into early 2020. When the stock market fell dramatically starting in late February when Coronavirus spread past China’s border, the shares of oil and gas companies did even worse. As of the close of business on March 27, the S&P 500 was approximately 24% lower than the all-time high on Feb. 19.

(Source: Barchart)

The chart of the Energy Select SPDR Fund (XLE (NYSE:XLE)) shows that the ETF that holds a portfolio of the top oil and gas producing companies reached its peak in 2014 at $101.52. At $21.85 level at the end of last week, the XLE was 78.5% lower than its record high. Rising levels of debt have weighed on the share prices of energy-producing companies. The global pandemic pushed the companies off the edge of a bearish cliff.

The 2020 Election: Energy Independence With Government Ownership Or Idle Production?

When it comes to the natural gas market in the U.S., the Trump administration has been an advocate of fracking and increasing production. At the start of 2020, U.S. energy production versus support for the “Green New Deal” by the opposition party looked like one of the critical issues for the 2020 presidential election. Coronavirus has changed everything. With the energy producers facing bankruptcy on the back of low prices and a virtual shutdown of the U.S. and global economies, bailouts are necessary to keep natural gas flowing. President Donald Trump insists U.S. production is a national security matter. His challenger is likely to advocate for more regulations and less output.

Meanwhile, government bailouts over the coming weeks could lead to equity ownership of the leading energy companies, while others fall by the wayside. The fallout from the global pandemic will cause changes in the way we conduct our lives and businesses. If the U.S. government continues to consider natural gas a national security issue, we could see some degree of nationalization. At the very least, a big chunk of equity in the hands of Washington D.C. would put government bureaucracy in charge of decision-making.

When it comes to the price of natural gas, the futures typically make seasonal lows around this time of the year. However, March 2020 has turned out to be anything but an ordinary time in history.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.