Natural-Gas Futures Climb
As Cold Drains Inventories
By CHIP CUMMINS
Staff Reporter of THE WALL STREET JOURNAL
Colder-than-normal weather has eroded the nation's cushion of natural-gas inventories, which may
mean already-robust prices could go even higher during the peak heating months still ahead.
Some forecasters are predicting natural gas will reach $6 per million British thermal units or even
higher by early next year, based on larger-than-expected storage withdrawals in recent weeks. The
surprising drawdown is a sharp turnaround from just a few months back when inventories
appeared ample.
Late Tuesday at the New York Mercantile Exchange, natural-gas futures for January delivery
finished at $4.636 per million BTUs, up 27.7 cents from the previous day's close. That is more than
80% above prices this time last year and as high as the contract has traded since the middle of last
year. But it is still well below prices of nearly $10 per million BTUs in late December 2000.
Utilities across the country have already been warning customers that higher prices are likely this
winter. Wisconsin Energy Corp., the Milwaukee-based parent of Wisconsin Gas Co., is telling
customers to expect home heating bills to be about 34% higher than last year because of higher
wholesale prices and colder temperatures. "Gas prices are expected to be higher, and customer
usage will be higher," said Bob Whitefoot, the utility's director of gas management.
Utilities and other users have been withdrawing inventories to meet surging demand during recent
blustery weather, including chilly temperatures in the Midwest and ice and snow storms across the
East.
In early August, stored inventories of gas were about 12% higher than the same time last year,
leading many analysts to shrug off the possibility of significantly higher prices this winter. But that
surplus turned into a deficit in early November. Last week, the Department of Energy reported 2.96
trillion cubic feet of gas in storage at the end of last month, down 9% from the same week last
year.
"We've had some significant draws" from storage, said Kristin Domanski, manager of gas and
power services at Energy Security Analysis Inc., a Boston energy consultancy. Ms. Domanski had
already been expecting prices to increase because of heavy buying this year by noncommercial
players, such as commodity-focused hedge funds.
But now fundamentals of supply and demand also are supporting her bullish call, Ms. Domanski
said, suggesting prices could peak at $5.90 or $6 per million BTUs by January. "There's still the
potential that storage [comparisons] will go down further," she said, adding that military action in
Iraq could also bump gas prices in response to climbing oil prices.
In a report last week, Marshall Adkins, a stock analyst at investment firm Raymond James in
Houston, said prices could run to about $7 or $8 per million BTUs in coming months. Mr. Adkins
cited falling production levels, weather-related demand and limited scope this year for fuel
switching, which helped ease a price shock in the winter of 2000-2001.
Other independent and Wall Street forecasters, however, aren't quite so bullish. Gas inventories are
still in line with averages for the past five years, providing some comfort that markets won't match
highs seen in 2000-2001. And it is unclear whether colder-than-normal weather seen in October
and November will continue.
Still, the government's Energy Information Administration warned in its short-term forecast late
Monday that gas prices are poised to rise through January and February unless there is a "profound
turnabout" in the weather. The agency predicts gas prices this winter will average about 60%
higher than last year.
Consumers aren't likely to get any quick relief from increased production. Despite steadily rising
gas prices since mid-September, drilling activity by oil and gas companies has actually fallen off
considerably, and analysts are predicting a significant annual production decline. |
