Natural gas stocks beat oil names. Here’s why.

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Unlike oil, natural gas does not have a cartel to stabilize prices, so they are likely to remain volatile.

Joe Raedle/Getty Images)

Oil prices traded lower for most of July, with U.S.-traded crude futures dropping below $100 a barrel before rebounding to $102 on Monday.

The crisis has hit oil inventories across the board, with most producers, refiners and service companies falling more than 5% in the past month, and many in double digits.

Conoco Phillips

(symbol: COP), for example, fell by 14%.

Some analysts worry that oil stocks could remain stuck at these levels for an extended period, even though most have healthier balance sheets than they have in years. Fund managers have been reluctant to buy oil stocks despite their financial discipline and historical role as an inflation hedge.

Citi analyst Scott Gruber writes that oil producers and oil service companies could be in “stock market purgatory” at the moment, in part because fund managers fear oil prices have more headroom fall in the event of a recession.

Natural gas was a different story, however, and Gruber thinks investors are more open to buying gas-focused producers. Stocks from producers such as the Pittsburgh-based company

EQT

(EQT) have been better bets over the past few weeks, and the commodity has been rising rapidly recently. On Monday, natural gas futures rose 6.3% to $7.46 per million British thermal units.

Natural gas has always been used primarily for heating, and it tends to fluctuate depending on how cold it is in the winter. But it has become a more important source of electricity in the United States and elsewhere. Heat waves in Europe – including forecast record temperatures in London – and the United States this summer mean more people are using air conditioning, leading to increased demand for electricity.

Meanwhile, Russia’s invasion of Ukraine has jeopardized the world’s natural gas supply, as Europe depends on Russia for 40% of its gas. Russia recently shut down a major gas pipeline, Nord Stream I, saying it needed maintenance.

There are now concerns that flows will not be restored after the work is completed, leading to higher gas prices, according to Bank of America analyst Francisco Blanch.

Liquefied natural gas (LNG) prices in Europe were recently trading around 186 euros per megawatt-hour, about 100 euros higher than in mid-June, Blanch noted.

“We see additional upside risk to global gas prices as winter approaches if Nord Stream I remains offline, with TTF prices rising above 200 euros for an extended period to dampen gas demand and stimulate EU LNG imports,” he wrote.

The TTF is a Dutch reference price for LNG.

Nord Stream is not the only threat to gas supply. Russia’s Gazprom has declared force majeure to at least three European gas buyers, meaning their supplies could be capped, according to Bloomberg. The less gas Russia supplies to Europe, the more the continent will have to rely on other suppliers.

Europe has been rushing to fill gas storage tanks since the Russian invasion, but now it looks like it could run out of supply sooner than expected, and potentially push prices even higher.

“In April, we expected the coming European winter to be a difficult time for consumers and governments,” Rystad Energy analyst Vladimir Petrov wrote in a report released on Monday. “Our updated scenarios show that Europe will likely head into the storm much sooner than previously thought and the region will be underprepared for the chaos it will bring.”

Unlike oil, natural gas does not have a cartel to stabilize prices, so they are likely to remain volatile. Blanch thinks they are likely to remain high for an extended period given the supply and demand issues and the lingering risk premium from the Russian invasion.

US natural gas producers should benefit from this momentum, as they have been able to sell their gas at higher prices given the growing demand in Europe.

After a plunge in June, US natural gas prices are up this month, and several stocks have also persevered. EQT is up 4.5% over the past month and

Range Resources

(RRC) increased by 3.8%.

Write to Avi Salzman at [email protected]

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