If this was a logical market, I'd have all my $$ in oil!
Or Natural gas.
Huge Price Gains Make
Natural Gas Appear
Solid
By Howard Simons
Special to TheStreet.com
5/30/00 5:00 PM ET
For those of you who prefer exuberance of the rational variety,
may we direct your attention to natural gas, the only
commodity to double in price so far in 2000?
While gasoline prices have been turning a few heads of late, at
least we have some usual suspects, such as OPEC and the
Environmental Protection Agency, to blame. Natural gas,
however, is produced right here in the U.S. and in Canada,
and has long been the great hope for environmentalists.
Natural gas: We loved it to death.
As in the case of all romantic tragedies, it wasn't supposed to
happen this way, and certainly not at this time of year. Natural
gas prices, unsurprisingly, have tended to peak during the
middle of winter and to be soft in the late spring and early
autumn, the so-called "shoulder" months of energy demand.
But we can see below that the natural gas seasonal cycle has
been anything but stable over the past quarter-century.
After price deregulation was phased in, prices rose rapidly in
the winter and fell in the summer. Once natural gas-futures
trading began in 1991, the seasonal peaks and troughs began
to narrow as predicted by futures market theory. A second
and smaller seasonal peak began to emerge, corresponding to
demand from electric utilities. By 1999, this peak was above
the annual average.
The current $4.406 price is near the winter record of $4.573
set on Dec. 20, 1996. Moreover, the level of backwardation, or
premium of the first-month futures to the second month, is
rather tame. The winter price spikes, particularly those of
1995-96 and 1996-97, were accompanied by surges in
backwardation as well.
This move in the intermonth spread reflected, correctly, the
sentiment that prices would soon retreat. No such warning
sign is embedded in today's forward curve of natural gas
futures. Option volatility has risen to 50% from 40% to reflect
the greater risk in the market, but nothing in the market's
structure is indicating a peak.
Who Wins, Who Loses?
We demonstrated last week how utilities could defend
themselves by vertical integration into natural gas production
and active natural gas trading and risk management. How
have other large, natural gas-dependent industries, such as
petrochemical producers, fared in this higher fuel and
feedstock environment, and what are the implications for the
future? (Natural gas is used as both a raw material and as a
fuel. It is used by petrochemical and fertilizer manufacturers
as a raw material -- feedstock -- and this gives these
companies a double-whammy on the higher prices.)
Two indices were examined relative to the S&P 500: the
AMEX Natural Gas Index, or XNG, of natural gas producers
and the S&P Chemicals Composite Index. The paths of these
two indices, and of natural gas prices themselves, are shown
below.
Two features stand out since March 1994, the first date when
data were available for all the indices: the extreme
underperformance of the XNG until last winter and the sudden
collapse of the S&P Chemicals Composite at the same time.
Du Pont (DD:NYSE - news - boards) dominates the
16-member Chemicals Composite Index with a 37.449%
weight; Dow Chemical (DOW:NYSE - news - boards) is a
distant second with a 16.643% weight. Du Pont had, by any
measure, a horrible first quarter, plunging from a high of $74
on Jan. 7 to a low of $45.0625 on March 13.
Dow Chemical didn't do much better, falling from a high of
$141.5 on Jan. 6 to a low of $92 on March 8. These plunges
coincided with the Nasdaq Composite Index's surge; they
were the good old days when the Nasdaq rose while the Dow
Jones Industrial Average fell on a regular basis.
The chemical industry, like most basic-materials industries, is
a sensitive economic barometer. Higher feedstock costs and
an economy slowing under the weight of interest-rate
increases are quite negative for these stocks. While we may
be getting close to the end of the interest-rate increase cycle,
the threat to growth of the Old Economy variety is still quite
real; no one yet knows whether the Fed has already gone too
far.
The path of the XNG index is slightly more intriguing. This
group has been sliding relative to the S&P for six years, and it
ignored all previous winter price spikes -- the ones
accompanied by high backwardation. As noted above, the
present price increase is neither in the winter nor
accompanied by strong backwardation. As a result, it may be
far more sustainable and far more conducive to long-term
earnings increases in the sector.
The catch, and it is a big catch, is how difficult it is for
primary-commodity producers and distributors to capture the
economic rent of higher prices. Ultimately, price increases
lead to slower demand growth and stimulate new sources of
supply and/or substitution, and both of these effects get
passed up the supply chain to the wellhead.
Companies that are vertically integrated and manage risk well
should win; the losers likely will be those that use natural gas
as a feedstock.
thestreet.com
*************
Cooking With Gas
Flip your burger and call your broker
By John Edmiston
I'll be cooking hamburgers this Memorial Day weekend, using my
brand-new natural-gas outdoor grill. The weather in Houston is expected to
be sticky and in the 90s, and the air conditioner inside will be on full blast.
Oh yes, natural-gas prices are well above $4.30 per million British thermal
units, and counting. Should I be concerned?
Natural-gas market participants contend that a bidding war is building in the
natural-gas industry, fueled by a perception that available supply of gas is
dwindling. So it's hold on to every moleculeand buy. "We haven't seen the
highs for the year yet," says one California-based trader.
On Friday the New York Mercantile Exchange's June futures contract hit a
high of $4.50 per million BTUs, more than double where prices began the
year, and the highest price since December 1996.
Why $4-plus prices? Consider deliverability problems (the pipelines' ability to
move gas to meet demand), anticipated low storage and low production
levels, plus a rallying oil market.
KEY COMMODITY INDEXES
CRB Group Indexes
5/26
5/19
Yr. Ago
CRB Futures
225.00
223.35
187.00
Industrials
212.01
209.00
179.00
Grain/Oils
178.60
181.49
157.80
Livestock
251.54
251.33
223.30
Energy
300.75
293.84
168.80
Precious Metals
258.49
258.23
228.50
Barron's ~ Bridge Telerate
On Wednesday, the Nymex expanded trading in natural-gas to allow the
purchase of $7.75-$8 options for next December. Tom Saal, a vice president
with Pioneer Futures in Miami, says a bidding war between marketers and
utilities for gas supplies explains the runup in prices. Marketers are buying gas
to ease electricity load prices for summer air conditioning, and utilities worry
about safeguarding enough gas for next winter. Marketers expect a normal
winter for a change as the La Nina phenomenon dissipates. According to the
National Weather Service, La Nina has tended to mean wide
month-to-month variations in North American temperatures, rainfall and
storminess in winter and spring.
The past three winters have been mild, tempering demand, Saal says. Mild
hurricane seasons have meant little disruption in Gulf supply. But hurricane
experts predict a brutal season this year. "What happens when you take
another four billion cubic feet off the market?" asks another Houston trader.
And the summer cooling season is just beginning. Last Tuesday, for example,
with moderate temperatures over most of the country, peak load exceeded
last May's by 20 megawatts.
With earlier-than-expected coolingload demand and ongoing deliverability
problems, the overall pace of storage injections continues to be weak, says
Ron Barone, a natural-gas analyst with PaineWebber in New York.
According to him, the industry must inject 77 billion cubic feet a week to
reach the targeted storage level for the winter of 3,000 billion cubic feet.
Barone doesn't think it'll happen. Expect a fill of only 2,500 billion cubic feet,
he says. In 1994, only 3,085 billion cubic feet was in storage by November 1;
in 1995-97, storage averaged 2,800 billion feet, and in 1998-99 it averaged
around 3,000 billion feet.
"The big event will be winter," Saal says. So will 2,500 billion feet be enough?
Maybe. A cold, sustained winter will be the litmus test.
But during these past two weeks, physical gas traders reported that marketers
were pulling gas from storage, not injecting it, to sell at prices approaching
$4.20 a million BTU at the benchmark Henry Hub delivery point. "Sticker
shock is coming off," says Saal.
Although gas at $4 a million BTU is seen on the boards for the next couple of
weeks, most marketers see those prices tailing off, at least until winter.
Market trends indicate prices will skyrocket then, especially if storage is well
below standard levels.
Saal says the legacy of first-quarter 1999's exploration and production
budgets still haunt the market, when $14-a-barrel oil prices sent producers
scurrying for cover. Only recently have the rig counts started to improve. Will
that new supply of gas be available in time for the winter? That's the
million-dollar question, Saal says.
So what's the million-dollar answer, as Regis might ask? Forget querying
audience members or asking Regis to narrow your choices. With bears still
dozing ahead of the summer's heat, call your lifeline -- a broker -- and buy.
Gasoline futures rose to the highest level since the 1991 Gulf War, touching
$1.0284 a gallon on Friday at the New York Mercantile Exchange as
inventories remained tight ahead of the summer driving season.
Sugar reached a 16-month high as a delay in Brazil's harvest and forecasts of
a reduced harvest there led to a scramble for supplies. The July contract at
the Coffee, Sugar & Cocoa Exchange hit a high of 8.04 cents a pound
Thursday amid heavy buying from merchants and speculative commodity
funds.
JOHN EDMISTON is a reporter in the Dow Jones Newswires Houston bureau.
interactive.wsj.com
**************
I didn't realize that nat gas had doubled. More money spend on energy vs. recretaional toys.
Jack |
