Barrons piece on "nat gas" (that famous idea : "the best cure for high prices is ... high prices" definitely "comes to mind.")
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MONDAY, OCTOBER 3, 2005
COMMODITIES CORNER
Gas Prices on a Tear
By SPENCER JAKAB
BOTH LITERALLY AND FIGURATIVELY, the natural-gas market has been hit by a perfect storm. Freakish spring and summer weather have helped prices double in less than four months. First, an unusually wet spring snarled a key rail line carrying coal to utilities, forcing them to run on more pricey gas. Next, an unbroken stretch of above-normal summer temperatures forced generators to burn a greater quantity of gas than planned, in order to keep cooling systems up and running. Then Hurricanes Katrina and Rita ravaged the Gulf of Mexico, wreaking havoc on an area with 25% of U.S. natural-gas production during the period when utilities are normally socking away gas in storage for the upcoming winter.
"Mother Nature has been an incredible bull," says Citigroup energy analyst Kyle Cooper. "It's hard to imagine a scenario more bullish than we've had."
But what will she do for an encore? With gas at a previously unheard-of level around $14 per million British thermal units, traders say that a cold winter could send prices much higher. Nearly 200 billion cubic feet (bcf) of production has been lost to Gulf hurricanes so far this year and, with no end in sight to production curtailments, traders are betting that underground gas storage won't reach the comfort level of about 3,250 bcf that could soothe nerves before the heating season begins in November.
"Prices are telling you already that we're in jeopardy," says Guy Gleichmann, president of futures-broker United Strategic Investors Group. "If we get a colder-than-normal winter, we're just not going to be adequately supplied. It's going to be possible to get spikes to $15 and higher." While nearly all analysts agree with Gleichmann's warning of price spikes -- numbers as high as $20 are even being thrown around -- some warn that double-digit prices are pushing more and more consumers past their pain threshold.
"I think we're touching the limits in terms of what's sustainable in terms of prices," says Ron Denhardt, vice president for natural gas at Strategic Energy and Economic Research. "At these prices, I think there's going to be a tremendous amount of demand destruction." Anecdotal evidence abounds of industries like petrochemicals, steel and fertilizers citing natural-gas prices as the cause of bottom-line pressures and shuttered factories. According to Denhardt, industrial demand for gas has dropped considerably in the past year.
But the past few weeks seem to have put this demand response into overdrive. While it's hard to separate the effect of hurricane damage to Gulf Coast factories from purely economic considerations, the market has been surprised by how much gas has been left over for storage even as Gulf of Mexico drillers reported a substantial drop in gas production. Some analysts have remarked that it's almost as if there hadn't been a hurricane.
"If you lose 100 bcf of supply and 102 bcf of demand, that's bearish," says Cooper, who believes the market is overly fixated with how much production has been lost.
Price spikes notwithstanding, there's some evidence that the demand response would be even stronger if gas prices were to keep rising, effectively placing a ceiling on further gains. Denhardt says that about 2.5 bcf of demand a day could switch to distillate fuel oil at prices above $14 per million BTUs. If oil prices ease, this ceiling would come down correspondingly.
The upshot of stratospheric prices is that industrial consumers are being marginalized and an even greater share of demand is driven by utilities that will buy as much gas as they need to meet demand for heat or electricity. This will make the market even more prone to both booms and busts going forward. Aside from the obvious damage to the economy from whole industries being forced overseas, their absence will put the already hyper volatile gas market even more at the mercy of temperature than it is now. "Unfortunately, more and more of this industry is weather dependent, rather than economically dependent," laments Cooper.
CRUDE OIL FELL FRIDAY AMID CONCERN that high energy prices are taking a toll on demand and the economy. The November Nymex contract dropped 55 cents to $66.24 a barrel.
SPENCER JAKAB is a reporter for Dow Jones Newswires in Jersey City, N.J.
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