A Chill Is in the Air...
By Christopher Edmonds
Special to TheStreet.com
Originally posted at 6:04 PM ET 11/17/00 on RealMoney.com
Winter cometh. Natural gas riseth.
That's been the mantra this week as natural gas prices skyrocketed on news that gas storage -- the amount of gas stockpiled for peak winter demand -- dropped just as the first cold spell of the season arrived.
The December New York Mercantile Exchange contract closed Wednesday at $6.27 -- a record for gas futures prices -- before profit-taking pushed the contract back below $6 on Thursday. Still, from the beginning of November through Wednesday, the December contract gained nearly $1.58, a jump of more than 30%. In afternoon trading Friday, the December NYMEX contract was trading up slightly, at $5.94.
The steep reaction on Wednesday was the result of a weekly report from the American Gas Association that natural gas storage declined by 6 billion cubic feet vs. an expected increase of 5 to 20 billion cubic feet. That brings storage to just over 83% of capacity compared to more than 91% at this time last year. "Storage levels are significantly less than last year, as well as less than the five-year average," says Mark Easterbrook, an energy analyst with Dain Rauscher Wessels in Dallas. Inventories lagged last year by 274 billion cubic feet, and the five-year average lagged by 143 billion cubic feet.
And as demand peaks for gas in the coming weeks and months, inventories will only shrink through the winter. In fact, over the short term, forecasts suggest next week may bring another exciting ride for gas prices. National Oceanic and Atmospheric Administration forecasts suggest that stockpiles will drop along with temperatures, wrote Raymond James analyst Wayne Andrews in a note to clients on Thursday. "Forecasts calling for much colder-than-normal weather for the next 10 to 14 days, and the potentially large [natural gas] withdrawals that would result, provide tremendous strength for natural gas prices."
Still, given the steep rise and subsequent profit-taking in gas prices this week, the question of a fair equilibrium price this winter remains unanswered. And, are there ways to profit from natural gas prices and volatility other than dabbling in the volatile commodity itself?
This column has noted some predictions that natural gas shortages and high demand could push winter gas prices into the teens. While most pundits don't think we'll see prices quite that high, rising demand and shrinking supplies will stand to push prices higher in the near term. "There will be days during the early part of the winter, especially December and early January, that you will see $8 gas," opines Easterbrook. "It may only be for a day or two, but it is almost certain to happen."
Want proof of the impact of weather and storage? Early Friday, natural gas into California traded above $10 per billion-cubic feet, a result of higher-than-normal demand as an unexpected cold snap hit portions of the state. "You're seeing January weather in November and nobody expected it," says Charlie Sanchez, director of energy trading for Gelber & Associates, a commodities trading firm in Houston. One California trader said to expect more of the same in the next couple of weeks. "Everyone's on edge about storage and supply."
Volatility Sparks Marketer Profits
While the need for additional supplies of natural gas should boost the earnings of a number of natural gas exploration and production companies, the short-term volatility and tight market will directly benefit those companies that trade and market natural gas. Interestingly, many of the leading marketers are old-line utilities that have pushed into the new frontiers of energy.
Top Natural Gas Marketers in the Third Quarter
Company 2000* 1999*
Enron (ENE:NYSE) 28.8 15.4
Duke (DUK:NYSE) 12 10.4
Acquila (Utilicorp) (UCU:NYSE) 10.4 10.1
Coral 10.3 9.7
Dynegy (DYN:NYSE) 9.8 8.5
BP (BP:NYSE) 8.3 5.2
Sempra (SRE:NYSE) 8.1 5.8
Koch 8 5.5
Southern Energy (SOE:NYSE) 7.3 4.6
Reliant (REI:NYSE) 7 4.7
*by volume as measured in billions of cubic feet per day (bcfd)
Source: Gas Daily, Company Reports
Enron (ENE:NYSE - news), by far the largest marketer of natural gas, moves more than twice as much as its closest competitor. "Clearly Enron is the leader in the business and the company to watch," says Easterbrook." He rates Enron a strong buy, and his firm has not provided banking services to the company. His 12-month price target for Enron is $100.
Enron's chief executive says volatility in the gas markets will produce profits for his firm. "As far as the effect on our business, the volatility is more important than higher prices," said Kenneth Lay, Enron chairman and CEO in an exclusive interview with TheStreet.com. "And we've seen very volatile prices as they have moved higher. As one of the major providers of various risk management tools and products, the volatility in these markets have provided good opportunities." (For more of Lay's observations, stay tuned for a question-and-answer session with him in TSC's Streetside Chat on Thanksgiving weekend.)
While Easterbrook continues to like Enron's leading position in the gas markets, his best idea for the rest of the year is another Houston powerhouse, Dynegy (DYN:NYSE - news). "The recent weakness in Dynegy is an opportunity investors should take advantage of," says Easterbrook. "There are some political issues weighing on the company, but earnings visibility going forward should be very high, especially if gas remains tight and prices remain volatile." He also rates Dynegy a strong buy and has a target price of $67. Dain Rauscher has not provided banking services to the company.
Both Easterbrook and Sanchez think the markets will moderate as winter progresses. "As we move forward, markets will begin to realize we can handle the demand," says Sanchez. "We are seeing record volatility. It is inevitable that we will see more simplicity and we will move toward more reasonable pricing."
How reasonable? Sanchez thinks gas will be back in the mid-$4 range by the end of winter, quipping: "The market can move down twice as fast as it moves up." But before that happens, he says we are likely to see "price spikes and a hyper-reactive mentality" in the gas markets.
"This is a very exaggerated market," Sanchez says. "It is so intense and reactive."
That may very well lead to intense and exaggerated profits for a number of the leading gas marketers. |
