Is Natural Gas Down for the Count?

 

Wow! The August natural gas (“gas”) contract has fallen from a little over $13 per Million BTU to 10.57 at market close Friday, about a 20% drop in less than two weeks. Is it going to stay down, or pop back up? In favor of staying down there is increasing production from the U.S. deepwater, reduced demand from industries that supply house‑building materials, electricity from new windmill farms reducing the need for gas‑generated electricity and a build of 104 Billion Cubic Feet in the week ending July 11, 2008 (“the last week”). 

Even taking these factors into account, however, I believe that we will see a price recovery. If the low pressure wave in the Caribbean turns into a hurricane, we will see an extraordinarily fast recovery. But even if it does not, there are many factors that point to higher natural gas prices. 

First, it is important to recognize that because the readings for the government storage survey take place at 9 AM on Friday, the last week was far more affected by consumption on July 4 then July 11. And July 4 is a national holiday in which many businesses are closed and consumption of natural gas tends to be far lower than on a normal weekday.

Some may be comparing the build for last week, which was the 28^th week of the year, with the typical build for the 28^th week of the year. But July 4 generally falls in the 27^th week of the year, so this comparison is erroneous. Compared with the typical 27^th week, the last week was not a particularly large build at all, being just 6 billion cubic feet above the 5-year average of 98 billion. And the week-to-week change is an inherently noisy statistic, so one week’s figure should not drive big price changes. 

Between May 29 and July 3 of this year gas storage went from being 66 billion cubic feet below the 5-year-average storage to 120 billion cubic feet below the 5‑year average, despite the spot price of natural gas being above $12 per million BTU for the entire period. The weather was a little warmer than usual, but taking the nation as a whole, it was not tremendously warmer. And gas at above $12 per million BTU creates a far more powerful incentive to avoid gas usage than does the current price of $10.54. 

Let us imagine that I had a knob that I could turn to change the spot price of gas, and I was trying to handle that knob so that this country would end up with at least 3.2 trillion cubic feet of gas at the autumn peak, an amount generally considered adequate to get through the winter. After viewing last week’s storage figures, I would have nudged the knob a little in the “lower-price” direction and then continued to watch to see what effect the change would have and what sort of weather we would have. But the market has swung the knob a huge amount and I just do not think that it was justified. Moreover, there are long term reasons to be bullish on gas.

Disclosure: Long XTO

Comments

[2008traveler]

If you study the timing of the leak in the Independence Hub you should see that the price of Natgas was heading lower into the shoulder season. The leaks removal of 1 billion cubic feet per day caused the spike which lasted until the Hub was fixed and reached full production. At the same time that the Hub was cranking up, 200 million cubic feet per day of new production came on line from Thunderhorse. Natgas is domestic and plentiful so it should be decoupled from the price of crude. The only thing that could cause a spike before winter is a hurricane that actually damages infrastructure in the Gulf or I suppose scorching temperatures in the north for an extended period of time.

[Gary Lucido]

And what about the relationship between natural gas prices and oil? At some point natural gas starts to substitute for oil.

[Gary Lucido]

Looks like 2008traveler answered my question as I was asking it. However, natural gas ultimately should be exported to higher cost areas and even domestically it can be substituted for oil - maybe not in the short term but in the long term.

[investor88]

So the title should be "Natural gas not down for the count!". Article is a relief to longer term investors in leading natural gas stocks which have been crushed lately.

[Clearlead]

Short term down, but definitely not down for the count, first off you have both Al Gore and T. Boone Pikens touting it (albeit with somewhat different goals), but even more significantly you have the electric industry relying on it as the major fuel source for the next 30 years.

[notsosmart]

in many areas gas will be the alternative to oil.generating electricity will be a main consumer.

[NicholasVentimiglia]

Fedex, Ups, WM, and city busses already run at least in part on NG. GM builds about 20 models that run on NG for export, and Honda sells a model for sell in California. While I may be on the edge to suggest that NG will replace oil as our transportation fuel; it is 97% cleaner burning, we would have energy independence, and it would fuel a new burst of production as commoners scramble to buy their NG trucks.

[fireball]

is it time to repurchase ngs yet? i think longterm yes. the reasons are mentioned by the previous posters. one thing not mentioned is increasing world demand. europe is not going to trust russia for supplies any more than they must i would guess china will be wanting more.

[2008traveler]

Further analysis is required regarding NG as a transportation fuel. When Boone Pickens throws out the idea that NG is half the cost of gasoline, is he talking about BTUs or gas mileage equivalent? How does it compare in the tank? What would be the cost of modifications to existing vehicles? Don't forget the $2000 to $3000 to have a PHIL installed in your garage until gas stations sell compressed NG. The price at the pump and mileage are the key. And when we make all these changes someone should calculate when peak natural gas will arrive and what the ROI will be. If it lets me drive my big block Chevy sign me up!

[hanson001]

I wonder how much gas the Haynesville Shale will bring to the market. What will this 4th largest gas field in the world do to the price of NG? I am located in the Haynesville Shale in NW Louisiana. Being here, I am starting to hear production numbers.

Petrohawk has a horizontal well producing 16.8 million cubic feet per day. From Chesapeake's recent conference call on July 2nd, their 8 horizontal wells in the Haynesville are producing 5 - 15 mmcfe per day. Louisiana pipeline infrastructure is better than the other shale plays and our NG gets to market fast. It will be interesting to see what production in the Haynesville does to inventory levels.

[fireball]

2008TRAVELER fast cars are fun. enjoy.

[notsosmart]

even if the price goes down it will make it more economical to use.the price of oil simply cant be trusted in this world anymore.between spec & demand &availability it will point to gas use.

[paulk8756]

Gary,

NG can only become a substitute for oil if we decide to burn it in our vehicle fleet. And, despite Mr. Pickens best efforts, we show no signs of moving in that direction so far. Indeed, it makes such inestimable sense, barring some long term worldwide oil catastrophe, it's unlikely we ever will.

[wannaBillion]

Natural Gas is the fuel of the future. It is clean and green. Why do you think mastermind CEO, Aubrey McClendon, just bought 750,000 shares of CHK? He took advantage of CHK's offering of 25M shares at a bargain-basement price of $57.25 because he knows he will soon double his money. Natural Gas is drilled on-shore and will not pollute our oceans. It is the Democrats little angel, should they win the presidential election. It is the link between fossil type fuels and natural sun, wind and water power. Natural Gas is an excellent investment long term. It is a great investment short term, too. How long do you think our relations with Iran will remain stable. Use your minds. Invest in Natural Gas.

[2008traveler]

Until I can go down to my local filling station and fill up with natgas I think you just buy it in the fall and sell at the first sign of spring and be happy. Leaks and hurricane damage are for speculators.

[RussellUpsomgrubb]

Natural gas is a regional commodity, unlike the world market for oil. Cheniere Energy(LNG), was all the rage a couple years ago with their plans to build LNG re-gassification plants along the Gulf Coast. The stock is at $3.34 because the three countries with the most natural gas reserves in the world are Russia, Qatar and Iran and that gas is going to whoever will pay the most. While it doesn't have to be refined, freezing natgas into a liquid, transporting it in refrigerated tankers and then re-gassifying it is an expensive process. India has little in the way of domestic natural resources, China imports 50% of its energy needs and Japan and Europe have no domestic reserves to speak of. The price of domestically produced natural gas in the US will have to go up to attract any LNG from abroad. According to the Energy Information Agency(www.eia.doe.gov/emeu/i...), all of North America had proved reserves of 274 trillion cubic feet at the end of 2007. Natural gas in Canada is used in the production of getting oil out of the tar sands. By comparison, Qatar had 910 trillion cubic feet, Iran had 974 trillion cubic feet and Russia had 1,688 trillion feet of proved reserves. All of Europe had 234 trillion and Japan had 1 trillion.

[morgan77]

2008traveler- To me, it doesn't seem that far out that we would move towards using natgas in the next few years.
Interesting piece on the OIL VIX vs. nat gas today. Very timely piece if you get a chance to read it

www.greenfaucet.com/en...

[CTProgrammer]

This article is ridiculously short term. You're basing your investments on the reasons for NG prices LAST WEEK?!? And whether the coming months will be hotter or not? For the next decade or two, NG is the replacement for coal utility plants. The number of coal plants being built has been drastically reduced, and many plans for them shelved in favor of NG plants. Demand will be significantly up in the next few years.

[robc935]

Please keep in mind while you argue about how much money you can make off of N.Gas that most of the northern half of this country heats with N.Gas and heating costs have aready tripled in the past 5 years. 80,000 customers in Minnesota had their utilities cut off April 1 this year because they couldn't pay their bills over the winter months. Combined with higher (auto)gas and food prices, the number of cut offs could be in the millions next winter. The same goes for home heating oil. Elderly people on fixed incomes don't the room for high heating costs, I believe that N.Gas should be off limits for investors looking to make a fast buck, stick to messing with the other commodities.

[LucaAvellini]

The point about the impact of the leak is valid: it was announced on April 7 and it wasn't until June 16 that production reached again 900 mill cubic feet/day. In that period price went up by roughly 35%. However, in the period Jan 1-April 7, before the leak, price had already increased by 25%. In my opinion, the leak doesn't seem to explain the whole story.

[2008traveler]

Luca: The huge gain last winter was due to a couple of factors that all had to do with the weather and starting from a depressed price. One was we did not have any hurricanes which allowed supply building without interruption. Two the weather man predicted a warmer than normal winter. This prediction actually held through December putting more downward pressure on prices. My climate reports differed. They predicted a warm beginning and end of winter but with a bitter cold middle of winter. Kind of a head fake. If you averaged that warm-cold-warm scenario you would see a warmer average temperature. The first two parts of my weather forecast held true catching a lot of people by surprise when it got really cold causing a price spike. The last half of my weather forecast did not hold true and it stayed cold until the beginning of April depleting supplies. That is why you saw a 25% rise.