What's in storage for natural gas
Fuel price up 60% in a year and won't likely stop there
By Myra P. Saefong, CBS.MarketWatch.com
Last Update: 4:18 AM ET May 17, 2003
NEW YORK (CBS.MW) -- Natural-gas prices are up nearly 60 percent from year-ago levels and could rise even further if warm weather this summer and cold temperatures this winter raise demand for the fuel.
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"Natural gas has the potential to spike to new highs this year if pent-up demand and severe temperatures create a spike in consumption," said Kevin Kerr, a financial analyst at Weiss Research, a provider of financial market information.
Futures prices have risen nearly $2.50 per million British thermal units in the past year to surpass $6 per million BTUs, as cold winter weather and low production levels pulled domestic storage levels for the commodity to record lows.
Prices are up about 6 percent in the past week alone. The June natural gas contract on Nymex finished Friday at $6.13 per million BTUs, up from $5.806 on May 9 and $3.855 on May 14, 2002.
The price has climbed against a backdrop of tight supplies. Storage fell to 623 billion cubic feet for the week ended April 11, according to the Energy Department -- the lowest storage ever in its measurements dating back to 1994. See the historical data.
Stocks currently stand at 900 billion cubic feet as of the week ended May 9 -- 807 billion cubic feet below the year-ago level, according to the latest government update. See the gas storage data.
"Storage is at record low levels and by any account, it's going to be difficult to rebuild [it]," said Brad Beago, an analyst at Credit Lyonnais.
He points out that the natural-gas market put in 1.6 trillion cubic feet in storage last year, but burned 2.4 trillion to 2.5 trillion during the winter period.
"The question is, how can we replenish that 2.4 when we only had 1.6 to put in last year?" he said.
Upping the stakes
While companies have responded by increasing the number of rigs drilling natural-gas wells, the "prevailing wisdom is they haven't increased enough to stabilize supply, much less grow it materially" -- and "we're running out of time," said Beago.
There are around 825 rigs drilling for natural gas in the U.S. -- that's down from a peak in 2001 of 1,067, but well up from the bottom of about 600 or 610 in early 2002, according to Beago.
But there's a "six-month lead time for the increase in rig count to turn around production increases," so we're not likely to see the supply data reflect an output rise until late fall at best, he said.
Added to that, Robert Fuhrmann, an analyst at My Futures Online, doesn't think there's much ability left in the market to raise production. "Exploration of new domestic sources of gas have been very difficult and costly because of environmental regulations and deeper drilling by rigs producing in the Gulf will be time consuming and expensive," he said.
Fuhrmann also said "it will take years not months for the industry to produce enough new sources of gas to keep pace with demand."
"It will take years, not months for the industry to produce enough new sources of gas to keep pace with demand."
Robert Fuhrmann, analyst at My Futures Online
Ron Denhardt, vice president of Strategic Energy and Economic Research, said demand needs to be 6 percent lower than last year in order to get working storage up to "minimal acceptable levels" -- which he pegs at 2.8 trillion cubic feet -- by the end of October.
For demand to fall, the market will need to see "very high price levels," which is what it's experiencing, but "how high of a price level it will take depends upon the economic recovery, what kind of weather conditions we have this summer vs. last year and ... on what oil prices will do worldwide," said Denhardt..
What's needed
Producers need to add 2.3 trillion cubic feet to underground natural-gas storage "in order to ensure adequate supplies before the next heating season starts in November," said Thorsten Fischer, an economist at Economy.com.
"Every week that we have sub-hundred type, [billion cubic foot-type] injections, the tension on natural-gas prices increases."
Brad Beago, analyst at Credit Lyonnais
Beago's estimate is a bit lower. He said the market needs to reach a storage level of 2.7 trillion to make sure there's enough supply -- so it needs to put about 1.9 trillion cubic feet into the ground in the next 25 weeks or so.
"Every week that we have sub-hundred type, bcf-type (billion cubic foot-type) injections, the tension on natural-gas prices increases," he said.
Given that storage increases start to slow down in September and October, the gas market will probably need to put 100 billion cubic feet a week into the ground between now and the end of June, just in case you have a hot July and August that decreases the ability to "put significant volumes in the ground then," said Beago.
Price targets
With so much uncertainty surrounding the weather and adequacy of supplies in the next few months, it's not difficult to understand why many analysts expect prices to remain above $5 per million BTUs this summer and winter.
And some analysts even suggested prices well above that.
"Natural gas could see $7, $8, even $9 if demand builds and injections are low," said Weiss Research's Kerr. "The sky is really the limit."
My Futures Online's Fuhrmann expects prices to hold around the $6 level and possibly rally to over $8 this summer, noting that the key for natural gas prices depends on the price of heating oil -- if heating-oil prices stay firm, the market could see more companies switching to natural gas.
"Natural gas could see $7, $8, even $9 if demand builds and injections are low. The sky is really the limit."
Kevin Kerr, financial analyst at Weiss Research
Prices will likely test the $10 level or higher in the winter, he said. Prices haven't been that high in 2 1/2 years.
Economy.com's Fischer is looking for summer prices of around $5.50 to $6 for the first half of the summer. By the second half of the summer, the higher natural-gas prices would've sparked higher drilling activity and a rebuilding of storage, so prices will be reduced to around $4.50 to $5.
He doesn't see prices rising much past $6 for the upcoming winter season.
Either way, prices will likely end up at the highest level they've seen during any summer season, said SEER's Denhardt.
The benefactors
Against this backdrop of high natural-gas prices, the integrated energy companies stand to benefit the most, analysts said.
While some of the big -cap company names in this sector have seen "pretty good runs" from the high gas prices already, Beago said, shares of Anadarko Petroleum (APC: news, chart, profile), Devon Energy (DVN: news, chart, profile) and EOG Resources (EOG: news, chart, profile) still have more than a 20 percent upside potential each.
"Every quarter that we have these higher prices, it basically adds to the value of these [natural gas] companies and it makes investors more likely to look toward this group."
Brad Beago
And "then there's some smaller companies that could do even better than that," he said, singling out such companies as Newfield Exploration Co. (NFX: news, chart, profile), Patina Oil and Gas (POG: news, chart, profile), and XTO Energy (XTO: news, chart, profile).
"Every quarter that we have these higher prices, it basically adds to the value of these companies and it makes investors more likely to look toward this group," said Credit Lyonnais' Beago.
"Five years ago," he added, " nobody dreamed of these kind of gas prices." Futures prices stood around $2.17 per million British thermal units in May of 1998.
What's more, no one wanted to buy exploration and production stocks in a $35-a-barrel oil world knowing that $35 wasn't going to be sustainable, he said.
With the oil prices closer to $28 a barrel, it's "certainly much more of a reasonable level and that bear should be gone," said Beago. |
