natural gas pain = nuclear gain

Is natural gas next in line to set record?
Experts assess upside potential as weather spurs demand

By Myra P. Saefong, MarketWatch
Last Update: 5:48 PM ET Aug. 12, 2005 [ Page 1 | 2 ]
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SAN FRANCISCO (MarketWatch) -- Energy prices have grabbed the headlines in recent weeks with crude, gasoline and heating oil all reaching record highs, so it's only logical to wonder if natural gas may be next.

Crude-oil futures climbed above $67 a barrel on Friday and unleaded gasoline futures touched a record $2 a gallon. See Futures Movers.

Gains in natural gas, by contrast, have been lagging. But natural-gas prices climbed close to $10 per million British thermal units on Friday for the first time since November of last year, according to monthly charts. Prices are up around 58% in the year to date, after ending last year just above the $6 level.

Analysts attributed the recent gains for gas to record prices in the petroleum sector, which tends to spur demand for alternative energy sources.

"You can't ignore the fact that these high oil prices are pulling natural-gas prices up as well," said Bernie Feshbach, president of investment firm Feshbach & Sons.



"The chances for the near-month gas contract to be $10 to $11 in the next month or so is rather high as the November and December contracts are already above $10 per million British thermal units," said James Williams, an economist at WTRG Economics.

"At this point most of the movement in gas prices is driven by crude-oil prices," he added.

Natural-gas futures set a record price of $11.899 in February 2003, according to data from Alaron Trading.

And natural gas may soon be able to rally completely on its own merit again as the market heads into the winter.

Weather leads

The market is "already pricing for winter as if it's building in a colder-than-normal episode," said Mike Zenker, senior director in charge of natural-gas research at Cambridge Energy Research Associates.

Earlier this month, the National Oceanic and Atmospheric Administration predicted an "extremely active" hurricane season marked by the development of 18 to 21 tropical storms -- about double the normal number, according to Agbeli Ameko, a managing partner at First Enercast Financial.

Hurricane activity "encourages price activity," said Zenker, adding that even if a storm doesn't cause damage to facilities in the Gulf of Mexico region, they'll still result in platforms being evacuated.

Last year, the natural-gas market entered winter with around 3.3 trillion cubic feet of gas in storage, according to the Energy Department. That's about 300 billion above what the market considers adequate to meet normal winter demand.

But in late September to early October of 2004, right after Hurricane Ivan wreaked havoc on the oil and gas production facilities in the Gulf, natural gas was trading close to $10.

Ivan and its aftermath cut a total of nearly 4% of yearly gas output in the region between Sept. 11, 2004, and Feb. 14, 2005, according to the U.S. Minerals Management Service.

Right now, "we're not too far away from that same kind of [price] level for winter gas and we don't even have a Hurricane Ivan," said Zenker.

However, "predicting the weather is like predicting the length of a marriage in California," said Feshbach.

People who trade weather futures on the Chicago Mercantile Exchange seem to be betting on a colder-than-normal winter in the Midwest, said Ameko, though the outlook is a bit mixed in the Northeast.


Looking at the weather futures market is a good way to gauge the weather factor for natural gas since it's effectively a "consensus of all forecasts that are out there," he said.


And "the weather futures market has been rallying for the last six weeks," he said. Read more on the CME Web site.

Supply ample?

As for U.S. natural-gas supplies in storage, they've have been running about 149 billion cubic feet above the five-year average, totaling 2.46 trillion as of the week ended Aug. 5, according to the latest government data. See the report.

"We're in the injection season right now [and] will keep injecting until we reach 3 trillion cubic feet," said Ameko. Once storage levels reach that mark, the market will start drawing for the winter.

But now the market is indicating that 3 trillion cubic feet isn't enough to get through the winter, so traders are "putting a premium in gas prices today," he said.

Ameko expects supplies to narrow and by November and December, the market will start to see a deficit relative to the five-year average.

But Zenker believes "we are better prepared for this winter from an inventory level" than in 2003, when the market entered winter with a big deficit in storage.

"If we have normal weather between now and March of next year, we will enter and exit winter with a moderate surplus," he said.

Demand factor

Demand for natural gas has been strong so far this summer, with hot weather throughout much of the U.S. boosting consumption for the fuel, which is used to generate electricity.

Once the market gets through the hot part of the summer, gas supplies will start to rebuild and get into "somewhat of a surplus position heading winter," said Zenker. The surplus, however, may not be "very big."

Stocks were around 300 billion cubic feet above the five-year average a few months ago, he said. But that figure now stands at 149 billion above that average, according to the Energy Department.

At average daily consumption levels, that's "just a day and a half's demand worth of surplus storage," he said. And during winter, the market consumes about 100 billion in a single day.

Demand last year was 67.8 billion cubic feet per day for the lower 48 U.S. states and Canada, according to Zenker.

CERA expects demand to grow this year to 68.8 billion -- "most of that assumes a return to normal winter this year," compared with warmer than normal November and December last year, he said.

"The underlying weather adjusted supply-demand balance is not extremely tight," said Ron Denhardt, a vice president at Strategic Energy & Economic Research.

Fat chance?

The prospects for record-high prices for natural gas hinge on a combination of factors: high oil prices, the number of hurricanes, the limited availability of coal, a tight market for liquefied natural gas and how cold a winter the U.S. experiences, Denhardt said.

Tom Woods, a senior consultant at Platts Analytics & Forecasting, isn't predicting any near-term decline in prices.

The market would have to see "almost every market indicator line up positive and stay positive with almost no change into the negative for a very sustained period of time before you can break this" rally, he said.

Even then, it'll probably need about a two- to four-year period of "very, very positive news about the supply/demand balance before these prices would break solidly," he said.

That's not to say prices won't cap out at some point, but it would take that amount of years before prices "come back to something more reasonable," Woods said.