Dec. 8, 2000, 12:12AM
Gas prices volatile under pressure
Futures fall after reaching new high overnight
By DAVID IVANOVICH
Copyright 2000 Houston Chronicle Washington Bureau
WASHINGTON -- Natural gas prices soared to breath-taking heights, only to then drop out of the
sky Thursday as traders tried to assess the effects of continued supply problems against the first major
cold snap of the year.
And industry analysts warned this week's combination of high prices and extreme volatility could
continue through the winter, as gas producers struggle to keep up with rising demand.
Gas futures for delivery in January fell 11.2 cents to close at $8.373 per thousand cubic feet on the
New York Mercantile Exchange, after smashing all previous exchange records to hit a high of $9.539
per thousand cubic feet in overnight trading, the highest since natural gas began trading on the Merc
10 years ago.
Trading was halted for an hour Thursday morning after gas prices plunged at such a dizzying rate the
exchange's automatic curbs kicked in.
Despite the 12 percent drop from after-hours trading, Thursday's closing price was still the
second-highest close on record, after Wednesday.
A year ago, natural gas was trading in the $2.20 range.
Many industry watchers had predicted that the Arctic blast that brought frigid temperatures to much of
the Midwest and Northeast would prompt a price breakout in the gas market.
"This is like a breakout on drugs," noted one analyst, who asked not to be named.
The market's stomach-losing ride Thursday came after the American Gas Association reported late
Wednesday that gas inventories had dipped to 2.43 trillion cubic feet by the end of last week, down
nearly 3 percent from the previous week and off 17 percent from the same time a year ago.
While sizable, last week's stock drawdown was not as dramatic as many analysts had feared.
But with weather forecasters anticipating the coldest winter in a few years and gas inventories already
at low levels, many analysts worry stocks could reach perilously low levels by spring.
As a result, the U.S. Energy Information Administration already has warned residential customers to
expect substantially higher home heating bills this winter.
Houston consumers already are feeling the pinch.
In August, Reliant Energy Entex won approval of a fuel adjustment that will raise the typical Houston
gas customer's monthly bill to $60.22, up from $43.08. Another price increase is possible in
February.
Gas prices also affect electricity prices because an increasing number of electric power generators use
gas to fire their plants. The average Reliant Energy HL&P customer can expect to pay $179 a month
for electricity this winter, up from $139 last year.
Gas supplies are tight because, despite drilling at full tilt, producers have not been able to keep up a
demand propelled by a still relatively strong U.S. economy and rising electricity demand.
Cleaner-burning gas has become the fuel of choice for virtually all new electric power generation
coming on stream.
Indeed, over the next five years, power generation is expected to overtake residential and commercial
heating as the primary customer for natural gas, according to Bill Hyler, an analyst at CIBC World
Markets in New York.
What that means is the natural gas industry, which once enjoyed only one peak-demand season each
year -- the winter heating months -- now must cope with a second demand season -- the summer air
conditioning months.
By 2010, U.S. gas demand is likely to top 28 trillion cubic feet, compared with 21.4 trillion cubic feet
last year.
During the first nine months of the year, U.S. gas demand was up only about 2 to 2.5 percent over
last year, although use among power generators is up 7 percent, Hyler noted.
While the gas industry has been gaining new customers in recent years, the would-be increase in
demand has been largely offset by three extremely warm winters, analysts said. Now that
temperatures in much of the nation are running below normal, the new demand has become more
readily apparent.
"The industry got a little complacent, given that we had such mild winters," said James Yannello,
senior natural gas analyst with UBS Warburg in New York. "I think it's as simple as that. People were
not considering all the variables in the equation."
Oil and gas producers, who were clobbered a couple of years ago when energy prices collapsed,
were leery of cranking production too quickly when commodity prices began to recover.
"Sometimes you over-correct, and yes we over-corrected," said Thomas Driscoll, an analyst with
Lehman Bros. in New York.
But this year, first oil and then natural gas prices have jumped to 10-year highs, and confidence in the
Oil Patch has grown steadily.
Usually, producers can find reason to be optimistic about one of their commodity prices, oil or gas,
but not both, said Craig Clark, executive vice president of U.S. operations at Houston-based Apache
Corp.
"It's been a fun time," he said.
That confidence can be seen in the increased drilling activity.
The total number of drilling rigs operating in the United States last week was 1,090, up from 796 a
year ago, according to Houston-based Baker Hughes.
In November, 832 rigs were drilling for gas, up from 677 in June and 635 the previous year.
"So the industry's working" Yannello said.
Gas production, however, is still off about 7 percent from 1997's predownturn levels, Driscoll said.
Because of those still-tight supplies and ever-increasing demand, many analysts expect gas prices to
remain strong throughout the winter, although probably not at the kind of levels witnessed this week.
"This can drop on a dime," Yannello warned. "No one expected it this high. If the weather turns
negative, you drop just as fast." |
