What happened
Shares of U.S. exploration and production companies Centennial Resource Development (CDEV +0.05%) and Range Resources (RRC 0.81%) rose as much as 16% in morning trading on Jan. 12. Antero Resources (AR 0.06%) peaked at roughly 13%, and Southwest Energy (SWN +0.00%) jumped about 12%.
Image source: Getty Images.
By noon EST, all four had pulled back a little from their peaks but were still up notably. Southwest and Antero were holding on to roughly 10% advances, while Range was up 14.5% and Centennial up 15%. There's a simple reason for the advance and a more nuanced one, which might hint at what the future holds for energy markets.
So what
The quick story here is that energy prices were up in early trading, including both oil and natural gas. That said, natural gas was the bigger winner.
In the case of Antero, the company highlights that 65% of its production by volume was natural gas in the third quarter. Centennial Resource Development gets around 50% of its production from natural gas and natural gas liquids. Range Resources, meanwhile, describes itself as one of the 10 largest natural gas producers in the U.S. and one of the nation's top five natural gas liquids producers and exporters.
Southwest is less specific, simply saying it's one of the largest in both spaces. Clearly, a rise in the price of natural gas is good news for these four exploration and production companies.
It isn't shocking that this quartet had a good morning. That said, there's a story behind the notable increase in natural gas prices that's important for investors to think about. There's been a cold snap in Asia that's led to a material increase in demand for natural gas -- specifically, liquified natural gas (LNG). LNG is an important fuel in the region's electric grid. The unexpected nature of this demand spike left inventories low, with traders forced to rush out and find new supplies to get inventories back to normal levels.
According to industry watchers, the supply/demand mismatch is so large that prices for liquified natural gas in the region are at record levels. That has implications around the world, as the Asian region uses as much natural gas as possible. Thus, natural gas prices in the U.S. are also on the rise.
The key takeaway is that this has occurred at a time when the coronavirus has left supply and demand in the energy sector deeply out of balance -- but broadly speaking, it's been an issue of too much supply and not enough demand. In fact, at one point in early 2020, West Texas Intermediate crude, a key U.S. oil benchmark, actually traded below zero. From a big-picture perspective, the energy market has gone from energy producers effectively paying customers to take energy off their hands to Asian traders desperately trying to buy energy because of cold weather.
Oil and natural gas stocks have been deeply out of favor since the economic shutdowns used to slow the spread of the coronavirus curtailed demand. However, the market is always changing. Producers have pulled back, from OPEC to tiny U.S. exploration and production companies struggling to make ends meet. Demand, meanwhile, has started to recover from the worst of the downturn.
The situation in Asia is an extreme example, but it really is just the normal interplay between supply and demand. Energy is a highly cyclical industry, and what's happened in Asia shows that, eventually, things can and do change. It's probably a mistake to extrapolate the current low energy prices too far into the future.
Now what
One cold snap in Asia isn't going to completely rebalance the world's energy markets. However, it's an interesting example of how things work in the energy industry. Today, that meant big gains for natural gas heavy drillers. Over the longer term, it suggests that the oversupply in the energy market that exists today probably won't last forever.
