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Crude output cuts could see natural gas price soar ​​​​​

Natural gas could be a major benefactor if US crude oil production starts to tumble.

Oil prices have been the talk of the town this week, with the crash in US Crude valuations highlighting the ongoing crunch of sky high overproduction and a dwindling storage.

The end game for this scenario remains to be seen, yet with prices on the slide it makes sense that we will soon see output cuts take place irrespective of any agreements within OPEC+.

The image below from Federal Reserve Bank of Dallas highlights the predicament that faces US oil in particular, with the current prices seen across US falling short of the levels needed to turn a profit given the cost of production.

While the lowest point on each bar highlights how there are some producers which can operate in such an environment. However, the top end and mean responses highlight how many US producers simply cannot sustain production levels at these prices.

With oil prices in free fall of late, the question is what will be done about it. Beyond removing lockdown restrictions to drive up usage, there is little these oil producing nations can do to raise demand for the sector.

Needless to say, the idea of risking lives to help oil revenues isn’t a likely scenario. Thus it is the supply side that will likely respond to this recent breakdown in the energy markets.

Producers are likely to start trimming back their operations if we see further crude weakness, yet they will know that a big all-inclusive output cut would likely provide the positive shock needed to bring buyers back to the market.

With that in mind, traders should be aware that we could see a rerun of the previous cut scenario where US President Donald Trump tweets about the possibility of a huge cut to help bolster market confidence. The reality of such actions would come down the line when OPEC+ meet again. There is a possibility that these markets restore themselves over time, yet that could take some time.

Natural gas the potential winner if crude output plummets

The US has become the world's largest natural gas producer, with the growth in the shale industry ensuring that they also produced a huge amount of natural gas that comes alongside the oil. The chart below highlights how the Organisation for Economic Co-operation and Development (OECD) production accounts for the largest area of output in the world.

Out of those OECD nations, the key producer is the US which has been ramping up output over the years.

What happens to natural gas if oil output falls?

If oil production continues its decline, there is a real possibility that a huge swathe of the US oil and gas industry has to shut up operations.

This decision won't be taken lightly as it can often be difficult to restart operations once capped. Should we see a huge decline in output, it would also have huge implications for natural gas supply.

While natural gas demand will have been dealt a partial blow from an industrial slowdown, much of the residential demand will have increased from residential use. With that in mind, a sharp decline in crude production may realign crude supply and demand dynamics, yet natural gas prices could turn higher as a result.

Natural gas bottoming out

The natural gas chart highlights the sharp rise we have seen over the course of this month, with the monthly chart highlighting how this could be the beginning of a bullish phase which falls in line with the wider pattern seen over the past decade.

With the stochastic oscillator turning higher within the oversold zone, there is a chance we could see the beginning of another bullish phase over the coming year.

The four-hour chart highlights this recent break through 2.024 highlights the possibility that we are due to break through this area of resistance and drive higher from here.

With that in mind, long positions are favoured on a break through 2.070, with that bullish outlook negated if price breaks below 1.902.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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