Crude Oil, Natural Gas Prices Switch Directions over Past Six Months
Knight-Ridder Tribune Business News, December 1
For those who believe that the energy business is easy, consider how the price environment
for crude oil and natural gas has changed in the past six months.
At the end of March, crude oil prices dropped below the $15-per-barrel level that producers
-- and their bankers -- say is necessary to make a profit. And the once-proud Organization of
Petroleum Exporting Countries was drawing worldwide ridicule for its inability to enforce
production quotas.
Natural gas, freed from international influences on its market, was meanwhile cruising along
around $2.50 per million British thermal units, well above the profit line for U.S. producers.
The price of natural gas would eventually reach $3 per million Btus by the end of summer.
So energy company executives were happy to assure stockholders at their spring annual
meetings that they needn't fear, that Texas energy companies now weighted their reserves
about 65 percent to 70 percent in natural gas and only about 30 percent in crude oil.
Investors, accordingly, pushed energy stocks to 52-week highs.
But fast-forward to November, and OPEC is behaving as if it's 1973 again. Six months of
newfound discipline among its nation-producers have almost doubled crude prices, to above
$25 per barrel, enough to make economists worry about the effect that oil prices could have
on inflation.
And at the same time, Christmas shoppers in Chicago and Boston are moving about in
shirtsleeves, courtesy of a warm weather spell that has pushed natural gas prices down by
9 percent and energy stocks well off of their 52-week highs.
"Last spring, you could have won a bet by asking almost every fund manager where would
they rather be, oil or gas?" said Bruce Lazier, analyst with San Jacinto Securities in Dallas.
"Gas was the obvious answer to everybody in the industry."
Lazier compares the experiences of Dallas-based Triton Energy Corp. to those of Cross
Timbers Oil Co. and Union Pacific Resources Group, both of Fort Worth. Triton has kept the
bulk of its assets in oil and even uses "OIL" as its stock ticker symbol. Union Pacific
Resources and Cross Timbers Oil Co., its name not withstanding, have weighed their
reserves in favor of natural gas.
Since mid-September, Triton's stock has doubled, to a close of $24 per share in trading
yesterday. UPR, meanwhile, has dropped from $18.50 to $13.06. And Cross Timbers has
fallen from $13.50 to $10.18.
"And Union Pacific Resources and Cross Timbers are both excellent, well-managed
companies that we like a lot," Lazier said. "It just shows that the market can be fickle."
Indeed, analyst David Garcia of Everen Securities in Houston advised investors suffering
from natural gas price-shock to "take an aspirin, wait two weeks, and things may very well
be better."
Garcia said the energy markets are "too fixated on daily price fluctuations," which he said
distort what has been a significant longer-term improvement in natural gas markets.
"A year ago, we were looking at a price plateau of $1.90-$2.00 per million Btus for natural
gas," he said. "Now the plateau is in the $2.40-$2.50 range.
Garcia said that, industrywide, "conditions are better than at any time in the last 15 years.
U.S. and worldwide demand are both strong with no signs of a letup and producers have
worked off the huge overhangs from the market."
But as Garcia notes, the new reality for energy companies and their investors is that the big
fund managers have other places to put their money.
"The fund manager who wants a 30 to 40 percent return on investment can put money into a
dot-com stock and not have to worry about a warm spell up north," Garcia said.
Ron Gist, who follows natural gas prices for Purvin & Gertz of Houston, said the National
Oceanographic Service prediction last month of a warmer-than-usual winter has knocked the
air out of the natural gas market.
But he said market psychology through the summer, when natural gas prices were pushed to
a nine-year high of $3 per million Btus, was also flawed.
"There was a determination to have a bullish market for natural gas, and we now can see
that was overdone," Gist said. "We forget that production capacity is higher than ever, and
that a lot of gas can be stored in underground caverns, depleted oilfields and even packed-in
pipelines." |
