US natgas prices seen supported by rising economy
Tuesday January 6, 5:54 pm ET
By Chris Reese
NEW YORK, Jan 6 (Reuters) - U.S. natural gas prices are likely to hold near record highs this month, buoyed by the demands of a recovering economy and concerns over dwindling output, energy analysts said on Tuesday.
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And while the market seems resigned to bullish prices, traders point to ample supplies of gas in storage tapped to meet what so far has been a generally mild heating season, fundamentals that normally would point to weaker prices.
Increasingly, however, a "normal" winter gas market spells a season of intense price volatility, driven by fear.
"We're in uncharted territory and nobody wants to get caught short," Sam Brothwell, an analyst with Merrill Lynch (AMEX:STH - News) said on Tuesday in a research report.
"We believe the market is ... coming to grips with the fact that demand outstrips our ability to grow domestic supply of America's favorite fuel," he said.
Natural gas prices have popped this week to near-record levels over $7.00 per million British thermal units, with most traders citing rising heating demand as furnaces are fired up in cold weather in New York and Chicago.
But experts say short-term weather forecasts are only one element of a complex trade picture that has boosted spot gas, or gas for next-day delivery, to $7.04 per mmBtu, 41 percent above the year-ago price of $4.99 per mmBtu.
SHORT COVERING
Late last year many traders sold the market short, betting prices would decline, after producers managed to sock away above-average amounts of gas in storage to meet heating needs this winter heating season.
A quick cold snap early this winter pushed prices higher, forcing those in short positions to buy gas to meet sales commitments, which in turn further boosted prices.
Although temperatures in key gas-using areas like Chicago and New York returned to average above-normal in December, gas prices did not tumble to the levels seen before the rally, helped in part by strong crude oil.
Sources say a new shot of cold air early this month then built gas prices up from the elevated short-covering platform.
"Part of the overall surge in ... prices recently has been tied to aggressive short covering -- more recently the move has been associated with the cold weather we are seeing," said James Yannello, senior utilities analyst with UBS Investment Research, a unit of Swiss bank UBS AG (UBSN.VX).
Despite expectations of below-normal temperatures through the Northeast and the eastern half of the Midwest into mid-January, forecasters generally have not called for this winter to be as cold as the below-normal average last winter.
IMPROVING DEMAND
Phillip Pace, a natural gas industry analyst with CSFB in New York, told a conference call on Tuesday that gas prices would remain strong due to an "improving demand trend" based mainly on the economic recovery in the United States, where industrial activity accounts for about a third of total gas demand.
He also cautioned that the supply squeeze stemming from the depletion of older fields in North America was likely to remain a concern this year, but pointed also to lofty crude oil prices supporting the entire energy complex.
Prompt crude oil futures on the New York Mercantile Exchange are fetching about $34.00 a barrel, their highest level since March 2003.
"It's not at all out of question you could have $7 (per mmBtu) gas in February, but it depends on oil prices ... and the weather," Pace said. (Additional reporting by James Jelter) |
