Gas Pains
Warm trend, supply bloat pressure prices
DECEMBER 6, 1999
By Cheryl Strauss Einhorn
As oil last week soared to its highest price since the Gulf War, topping its three-year high near $27 per barrel, natural gas experienced a near-vertical slide. January futures fell 30% from a high of $3.28 per million British thermal units (MMbtu) in October, to a low of $2.33. And for the first time since the 1994-95 winter, January futures traded below the February contract.
In hindsight, it's no surprise. After all, we've just experienced one of the mildest Novembers on record, with temperatures 21% warmer than normal. Hence, there was little heating demand last month. In fact, during the first two weeks of November, there was no gas storage drawdown on a net basis -- a real problem for the market.
The mild weather caught many gas-industry players by surprise. After suffering through two very warm winters, many companies had expected a return to normal this year and had aggressively bought supplies during the early autumn. Indeed, back then, bid-week contract indexes which show what the industry is willing to pay for gas for the following month-rose above $3 at the benchmark Henry Hub delivery site in Texas.
Those stocks have become a burden. "The warm weather has led to a scramble almost each and every day to place the supplies," says John Saucer, Salomon Smith Barney's energy analyst.
Result: Henry Hub cash prices are now about $1.20 below those bid-week index prices. "The virtual panic in placing gas for the long holiday weekend is what proved to be the proverbial last straw for support near the $2.40 level on December futures and $2.55 on the January contract," he says. "It appears likely now that January futures will test the December contract low at below $2.20, barring any dramatic turn in the weather, which is so far not forecast." Friday, the January contract closed at $2.30 per MMbtu.
This inauspicious start to winter has made it increasingly likely that the market will be hobbled by oversupply. According to the American Gas Association, three trillion cubic feet of natural gas are now in storage -- just 73 billion cubic feet below the high levels of 1998 and more than 191 bcf higher than the five-year average for this time of year.
Of course, U.S. gas production has declined. But that won't bolster prices in the face of strongly reduced demand.
Worse yet, gas drilling actually has increased dramatically lately. The number of rig counts surged in the past seven months, increasing by 80% since the bottom in April and rising by nearly 40 rigs in the past month alone. The count now stands at 648 rigs, within 10 of the recent 12-year high. As a point of comparison, the U.S. oil rig count remains near record-low levels. Capital continues to be funneled toward gas because its fundamentals had been expected to be so positive this year.
Moreover, companies have been focusing their drilling on proven regions, meaning that success rates have been high. In the Gulf of Mexico the rig count has soared by more than 200% from recent lows, while the number of oil rigs has fallen almost 100%. Goldman Sachs energy analyst Jeff Curie points out that "currently only one rig is drilling for all the oil in the Gulf, down from 60 rigs in May."
Natural-gas rigs in the Gulf tend to be quite productive in their first year. Curie's conclusion: "The impact of these dramatic increases in drilling will likely be a substantial increase in supplies during the second half of 2000, placing downward pressure on prices. We continue to believe that the 2000 summer strip [the average of the summer contract prices] and calendar 2001 are overvalued at $2.38 and $2.51, respectively."
And while it is too early to write off the entire winter season, based on one warm month, the longer it takes for the cold to arrive, the nastier the weather will have to be to "re-tighten a market that appears to be damaged goods after its recent wipeout," says Saucer. If the shift toward better demand doesn't occur by mid-tolate December, the winter of 1999-2000 will be harsh indeed for the natural-gas industry.
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Above from this Saturday's Barrons. Time to jettison more of the E&P's that are heavily gas-weighted, IMO. Keeping most my TMR since 70% of their production is oil, on a dollar basis. |
