The Buzz Surrounding Natural Gas
27-Jun-03 00:03 ET
There has been a lot of press and interest in natural gas lately, and numerous questions have been raised. In keeping with our view that an educated investor is a better investor, we thought a quick recap on what is happening would be helpful.
Greenspan Speaks, People Listen
What started this whole interest in the price of Natural Gas was a June 10, 2003, speech by Federal Reserve Chairman Alan Greenspan. Savvy investors will note that when Greenspan talks, markets listen. This case is really no different, as Chairman Greenspan outlined what is looking like a serious problem.
To sum up the point of his speech, Mr. Greenspan believes that the low supply of natural gas, coupled with increasing demand will continue to drive prices higher. The Chairman gave an example: Yesterday the price of gas for delivery in July closed at $6.31 per million Btu. That contract sold for as low as $2.55 in July 2000 and for $3.65 a year ago. We can see that the price has increased, but why, and how can we gain any sort of edge by understanding this?
Natural Gas, a Quick Overview
First, we need to know something about natural gas and how it is traded. Natural gas is a commodity that is traded at several hubs, and these hubs all have different prices which are generally based on the laws of supply and demand. One might think that from Mr. Greenspan's remarks that the supply of natural gas is significantly lower, and that would be true to an extent. Less natural gas is used in the summer months, so less is needed for storage, but this is nothing new. What is new is that the levels of storage are going lower and lower; and at a time when prices should be falling as demand is falling, they are rising and being positioned for future growth.
Gas can be traded and shipped to where it is needed most, but costs and the ability to store liquid natural gas make that somewhat impractical. This basically means that it is hard for the US to import natural gas from around the world in mass quantities. This makes our natural gas problem a catch 22 of sorts as a commodity with its price rising dramatically, as natural gas has been, will likely see less mass usage, which in turn would decrease investment in opportunities to make the fuel more efficient.
Storage History and Currently
Recently, the amount of natural gas in storage was measured at 623 billion cubic feet, its lowest level since the government began keeping records in 1976. This storage number is about 38 percent below what it was last year and 28 percent lower than the five-year average. So the amounts being stored have dropped, but there is room to have much more available for use. Gas storage tends to drop to its lowest levels in June and to rise to its highest levels in November. In November of 1994, Bloomberg lists storage levels of 2.4 trillion cubic feet, so there is plenty of room to store the gas that is needed.
Liquid natural gas offers the potential to store even more gas which would effectively keep prices low, but there is not that much storage availability of liquid natural gas currently. Moreover, the costs associated with shipping in liquid natural gas and the construction of domestic facilities designed for it are still too costly.
Who Uses Natural Gas?
The industries that use the most natural gas are the chemicals industry, the fertilizers industry, and the steel and aluminum industries. These industries do not use gas on a calendar basis, or just in the heating season, but rather, the whole year round. They are seeing what they would normally think of as a somewhat fixed cost to be increasing, and increasing in a dramatic fashion. When Chairman Greenspan addressed the problem in the natural gas industry, he did not specifically say that this may hinder an economic recovery.
Utility companies are also large consumers of natural gas, but more so during peak usage times, allowing them to better hedge against price increases. The electric utilities prefer to burn clean natural gas as opposed to a less environment friendly coal. Greenspan noted that ``rising demand for natural gas, especially as a clean-burning source of electric power, is pressing against a supply essentially restricted to North American production.''
If it ends up being a warmer than expected summer, gas prices are likely to increase. The reason for this is that utilities will end up using more natural gas to generate electricity. This electricity will be used to power air conditioners which tend to eat up large amounts of power.
Your Gas Bill, Will It Go Up?
The simple answer is yes. The price of natural gas going up will certainly affect your bill, but how much it affects your bill is hard to determine this far away from the winter heating season. An Ohio congressman stated that he expects his constituents could see an increase of about $220 to their utility bills. That is just an estimate.
Gas Companies
So, who is likely to profit from this trend of rising gas prices? Most natural gas companies will profit to some degree, but a select few will likely be able to profit more than others. While it's hard to say if this move has been fully priced into the stocks of these natural gas companies, it's still good to know who might benefit.
The companies that will likely benefit the most from rising prices are those that have hedged out a great majority of their supply. While most companies use hedging products in one form or another, a few use it, and have used it to effectively control as much as 65% of their supply. Through supply management, and controlled selling of their cheap gas to other utilities (at spot prices, which will certainly be higher than current prices), the companies that have hedged out their supply could stand to post large profits after the winter quarters.
PGL, NFG and EQT are all examples of companies that have hedged out significant portions of their supply.
In Summary
There are a few solutions to the problem at hand and one is, as discussed above, the expansion of liquid natural gas shipment and storage. Another solution is to relax the restrictions on drilling, which would surely add to supply. The last is an age old concept that has never really caught on. In a word, it's conservation. It's the usual litany of conservation through education, technical assistance, and incentives - but this time if you are seeing an increase of $220 towards your gas bill, you might take it very seriously.
--Brian Bolan, Briefing.com |
