POWER POINTS: Volatile Gas Market Poised For Collapse
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- Wholesale natural gas prices could well be headed much lower soon, many in the market
think.
But if you're a bull, just wait a year. They'll be up again. Although much of the focus on the price of natural
gas has
been on the fact that prices have been high for the past year, the more glaring feature of the market is that
it's been
extremely volatile the past four years.
That volatility is due to a lack of liquidity in the market, a lack of gas trading companies and insufficient
storage
capacity. In the long term, all that inefficiency hurts producers and consumers alike.
"The market is much less efficient," said Ed Silliere, a trader at Energy Merchant in New York. "The
merchants had
created a marketplace that went farther downstream than is capable today. Risk management goes to the
major
players and stops right there. Consumers, too, can hedge short-term only."
In the near term, this volatility is likely to materialize as a sharp drop. Prices are running about 60% higher
than
they were last year. But with inventories and supplies growing, they seem unsustainably high to many.
"The market appears poised for a quick drop. It's oversupplied," Silliere said.
Silliere isn't alone in his bearish view. Well-financed speculators such as commodity funds have a net short
position of 18,000 contracts on the New York Mercantile Exchange, according to the Commodity Futures
Trading
Commission's most recent commitments of traders report - compared with a net long position of 5,000
contracts
this time last year.
The smart money was right to be long going into last winter, because gas prices skyrocketed. They look to
be right
again this year.
Cutting Forecasts
Last week, Lehman Brothers oil and gas analyst Jeffrey Robertson lowered his gas price forecast to $3.75
per
million British thermal units for 2004 from $4.25. He lowered his ratings on a few producers, including
Comstock
Resources (CRK).
U.S. industrial demand has fallen 3 billion to 4 billion cubic feet in the past year because of high prices, and
that
demand isn't coming back unless those companies can lock in much lower prices long term, said Silliere,
whose
firm works with such companies. The country has doubled its liquefied natural gas imports this year, adding
another 1.5 billion cubic feet a day, according to U.S. Department of Energy.
The rig count is also up. And while production is difficult to track - many analysts say it's down - the
Department
of Energy estimates production is up by about 1 billion cubic feet a day.
Together, that's a swing of 6 billion cubic feet a day, which represents about 10% of average U.S.
consumption.
The swing explains how the country put more than twice as much gas into storage last week as in the saw
week last
year, even though storage capacity is approaching full.
Current high injections won't turn on a dime and become withdrawals just because November arrives.
Pipelines in
some parts of the country are already packed, one source said.
How low will gas prices go? That depends on how cold the winter is in the eastern U.S. One trader
estimated
there's a 20% chance prices could rise a little in the event of a severe winter, but that a somewhat
colder-than-normal
winter is already priced into the market. Normal to warmer-than-normal weather could potentially crush
spot prices
back to $2, even if only temporarily.
Sick Market
The bearish outlook of some traders, like Silliere, extends out for years, but that's not what happened last
time. Gas
futures got to $10 in late 2000, dropped to $2 in the winter of 2001-2002 and quickly rallied back to $12
earlier
this year. If the forward price curve falls enough that marginal industrial consumers ramp up production and
producers shut wells, then the market is looking at another spike back up.
Maybe then this country will get serious about what a sick gas market - and power market - it has. The
demise of
U.S. energy marketing and trading companies has hurt liquidity, raised volatility and clouded direction for
where
capital is needed for investment.
One would think, for example, that the increased volatility of the past four years would have caused an
increase in
gas storage facilities. Owners of storage capacity profit from swings in price, which in turn would help
consumers
and producers by smoothing out the spikes and troughs.
But U.S. storage capacity has remained flat. Trading companies like Enron Corp. (ENRNQ), El Paso
Corp. (EP)
and Dynegy Inc. (DYN) not only built storage facilities, they were some of the best customers for other
storage
owners. They signed long-term capacity deals that helped smaller storage owners get the financing to build
new
facilities.
With those companies out of the trading business, they're selling off their capacity contracts. Storage
capacity is a
buyers' market. Few companies are building new, large storage facilities in that environment, even if market
volatility indicates that storage capacity should be at a premium.
The loss of merchants also has hurt liquidity beyond the very near term. The trading companies used to take
on the
risk of buying long-term supplies from small- to medium-sized producers at dozens of hubs around the
country.
While big producers such as Exxon Mobil Corp. (XOM) can still hedge with U.S. banks, those banks
haven't yet
taken on smaller producers, because those producers don't have the cash or credit required.
Congress, the Federal Energy Regulatory Commission and even Federal Reserve Chairman Alan
Greenspan fret
about the high price of gas and what central authorities should do about it. The possible collapse in prices
could
refocus their thoughts: What should the government do to rebuild the energy merchant function lost over the
past
three years?
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com |
