From WSJ:
POWER POINTS: Gas Troubles Seen In Storage, Not In Price
By MARK GOLDEN
A Dow Jones Newswires Column
NEW YORK -- The natural gas storage reports for the next two weeks could indicate just how serious the country's natural gas shortage is. How the country deals with that shortage could have a tremendous impact on the economy.
National supplies are at an all-time low of 623 billion cubic feet, according to the U.S. Department of Energy's weekly report on Thursday. During a shortage two years ago, supplies totaled 810 Bcf. The five-year average for this time of year is 1,221 Bcf, according to UBS Warburg gas industry analyst Ronald Barone.
Unusually cold weather in the East last week resulted in a surprisingly large withdrawal of gas from storage at a time when the country is usually rebuilding its gas inventory.
It was "the largest withdrawal ever recorded for the month of April," Barone noted to his clients.
And the country is heading into a summer when probably more natural gas than ever before will be used to run new electric generators, rather than being put into storage for the winter.
As a result, most people in the industry expect a sustained gas shortage for the next two years, and many expect that there may not be enough gas in storage to meet heating demand this winter.
"We're going to have deliverability problems next winter unless we have a winter as warm as 2001-2002 or a severe economic slowdown," said Barone in an interview.
What's perplexing, though, is that gas futures prices, though high, don't reflect the seriousness of the crisis. The price action has been similar to that of the gas shortage of 2000-2001, when the industry responded to high prices by bringing more supply on line quickly. Then and now, gas futures peaked at $10 per million British thermal units, collapsed to under $5/mmBTU by early spring, and rebounded a bit in April.
The price rebound this March was a bit stronger, and nobody knows if the downward price spiral will resume as it did in 2001. But the similarities so far are disconcerting because current storage levels are much lower than they were in 2001, the increase in rigs was much stronger then, and the burn at power plants will be higher this summer.
No Market, No Signals
This, according to Thomas McAndrew, former head of trading at Calpine Corp. (CPN), is a sure sign that the U.S. gas market is broken.
"Gas should be $8 right now," said McAndrew, who has taken a long position in gas futures.
"The only way we can avoid people not being able to heat their homes next winter is to destroy more industrial demand now. Clearly, you don't destroy demand at $5," McAndrew said.
The fundamental imbalance of supply and demand isn't getting fixed because the gas industry doesn't have the intermediaries it once had, McAndrew figures. If companies such as Dynegy Inc. (DYN), El Paso Corp. (EP), Enron Corp. (ENRNQ) and Williams Cos. (WMB) were still active in the gas market, they would see that gas futures for this summer and winter are clearly undervalued. They would buy up everything producers would sell for two years out. Those producers, with profitable contracts in hand, could get loans from banks to ramp up production.
Of course, Enron needed to go away for other reasons, and maybe Dynegy and others didn't have the financial strength to serve as energy banks, but the industry still needs to figure out how to replace the market-makers.
"The rig count is up 30%, but given prices you'd expect more" of a rise, said Kyle Cooper, energy analyst for CitiGroup.
Cooper, however, isn't too alarmed. If this summer and winter get normal to mild weather, the crisis and prices will ease a lot faster than most observers now realize, he said. Most gas-fired industry has already moved overseas due to higher average gas prices since 2000, so demand is now driven by residential heating and electric generating companies. Both uses are driven by weather, which now has a bigger impact on the market than before and is totally unpredictable.
Of course, we should hope Cooper is right and pray for mild weather. And just maybe, over the next few years, enough money will be poured into the industry's infrastructure that we won't need answered prayers to meet heating needs in the winter.
But, according to McAndrew, that seems very unlikely. California Gov. Gray Davis and a few other politicians blamed the gas and electricity crisis of 2000-2001 on energy traders rather than a fundamental supply and demand problem. While a few incidents of bad behavior were uncovered, McAndrew maintains, such activity was in no way the cause of the problem.
But the Federal Energy Regulatory Commission and other federal enforcement agencies have unjustly ratified Davis' view of things, McAndrew and Barone feel. So now FERC can't possibly convince the country that there's a fundamental problem with gas, that prices need to rise to higher levels to balance demand with supply and to attract investment, they argue.
"You have to give the capital markets confidence in the structures you put in place. FERC created these markets, but what they've done since doesn't create confidence," McAndrew said.
His prediction: Capital won't flow to raise supplies sufficiently, prices will remain well below the $7-$8 level that's needed now to start cutting use, then prices will skyrocket as an impending winter disaster becomes obvious.
"By this time next year we'll have more investigations by the FERC and Commodity Futures Trading Commission, more energy traders going to jail and full reregulation," he said.
For what it's worth, McAndrew has accurately foreseen most of the U.S. energy problems of the past three years. His outlook should be seriously considered not only for what it means to energy but to the U.S. economy overall.
"There's nothing more important to this economy than natural gas and energy," he said. "It's hard to imagine the economy growing 3%-4%, which Wall Street seems to expect, given our current energy infrastructure. And you want to talk about the psyche of country? Think about people not being able to heat their homes in the winter."
-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com
(Mark Golden has reported on U.S. electricity markets and policy for six years.) |
