Natural gas prices flat for the moment, but still robust through midterm

Natural gas prices are essentially flat at the moment--flat month-to-month and year-to-year--but that`s not necessarily a bad place to be.

Spot gas prices for July are up roughly 5¢ from the month before but down about the same amount from the same time a year ago, according to Dynegy Inc.`s latest survey (see table below). The good news is that, at an average price of $2.20/MMBTU, the market could certainly be a lot worse heading into the shank of the cooling season. With a near-term forecast of blistering heat throughout much of the U.S. this week, don`t expect the flatness to linger.

It was the cooler-than-normal temperatures of late June that brought spot gas prices down from a recent high of about $2.40/MMBTU; conversely, the warmer-than-normal temperatures of last week and this week are pushing prices back up again as the year-to-year surplus of natural gas in inventory plays hide-and-seek. After disappearing briefly a few weeks ago, the year-to-year surplus reappeared during the last full week of June, albeit as a minuscule 3 bcf. The surplus has lingered through the end of last week, even growing to 22 bcf. The growth in the year-to-year surplus owes more to a stepped-up injection rate (and a stronger-than-expected performance by hydro and nuclear in the cooling load) than it does to temperature-related lagging demand. According to the latest data from the American Gas Association, the industry injected 91 bcf into storage for the week ended June 25, compared with 85 bcf in the prior week, 72 bcf in the same week in 1998 and 76 bcf in the same week in 1997.

The level of gas in storage in the U.S. was 63% full at last count, tallying 2.03 tcf last week, compared with 2.01 tcf for the same week in 1998 and with a prior 3-year average for the week of 1.64 tcf and a 5-year average of 1.73 tcf.

Storage is higher than usual, yet many of the forecasts call for a continued march upward in natural gas spot and futures prices for the rest of the year, reaching perhaps as high as $2.50-2.75 (some more excitable types call for as much as $3.00) by the end of the year. An early indicator of that strength is the August futures contract, currently trading at about $2.35/MMBTU. Injection rates need to be only about 60-70 bcf/week to meet the benchmark storage level of 3 tcf with which the industry likes to start out the heating season on Nov. 1. But storage injection is ahead of the usual pace, and still many analysts are optimistic about gas prices this year and next.

There are three main reasons to be optimistic about the near-to-mid term outlook for natural gas prices: 1) weather forecasters` predictions about a warmer-than-normal summer are starting to be borne out (don`t forget that the summer truly does not begin until the end of June, no matter what schoolchildren think); 2) immediate deliverability will be affected by the likelihood of severe weather this year, notably a predicted strong hurricane season in the Gulf of Mexico; 3) near-to-mid term deliverability will continue to be affected by the slowdown in drilling activity and accelerating depletion rates of U.S. gas wells.

There`s not much controversy over the first two reasons, but the third is fodder for many a bar bet. In fact, much of the accelerated storage injection rate can be attributed to operators` concerns over the likelihood of supply interruptions later this summer, which, in turn, helps to tighten the near-term market. It can also be attributed to concerns over an overall shortfall of supply owing to reduced wellhead deliverability in the second half.

And what of the deliverability dilemma? The recent downturn in oil prices has resulted in a collapse in overall E&P budgets this year. That, in turn, has affected deliverability, resulting in the U.S. posting a sizable decline in natural gas production in the second half (although the nagging question of depletion in the Gulf of Mexico should also be considered).

But the recent rebound in oil prices and continued robustness in gas prices are fueling a resurgence in E&P capital spending, which in turn bolsters drilling and workover activity. So why isn`t the increase in spending also fueling predictions that production will rebound, thus balancing the market? That`s the $64,000 (or $3/Mcf) question, and the answer is: time lag. For one thing, while oil prices are looking pretty healthy at the moment, there are questions about how well OPEC cohesiveness will hold this summer, when $18-19/bbl oil starts tempting some members of that group to start taking advantage of the higher prices by resorting to what some analysts euphemistically refer to as "leakage." Because of the continued uncertainty over oil prices, many operators are ramping up budgets, but there is no universal sentiment for higher spending, and just as many are standing pat on their reduced budgets. That can also be seen in the fact that almost all of the recently announced hikes in capital budgets are targeted toward natural gas.

So if increased outlays for gas drilling and workovers are the current trend, won`t production increases follow? Sure, but the uptick in production will lag current spending, not materializing until the fourth quarter. The real question we should be asking ourselves is: How much incremental production will result from this spending rally? Therein lies the key to the 1999 outlook for natural gas prices, and the betting here is that production will come to the rescue just in time to keep gas prices from topping $3/Mcf at the end of the year.

Here`s another wrinkle in the scenario: What role will Y2K fears play? There is every reason to believe that concerns over security of supply will contribute to building a significant storage surplus to go through the winter to help cope with any temporary outages caused by the millennium bug at the turn of the century. Of course, as U.S. motorists saw during the oil crises of the 1970s, the anticipation of a near-term shortage contributes to bringing about that near-term shortage; conversely, the anticipation of a longer-term shortage contributes to alleviating that impending shortfall.

So it would not surprise to see natural gas prices rollercoaster up as the end of the year (and the millennium) approaches, as a result of Y2K fears over and above the conventional concerns over demand, storage, and deliverability. And it would not surprise to see gas prices rollercoaster right back down at the dawn of 2000, when the greatest dangers from the turn of the millennium prove getting injured by idiots celebrating it by firing weapons into the air or by Y2K-fearing soccer moms trampling you at the ATM and supermarket to stock up on necessities.

Dynegy Inc.
Survey of Domestic Spot Market Prices
For the Month of July 19991
Price ($/MMBTU) For markets Receipt accessed by: point/zone Last Year2 Last Month2 This Month
ANR Custer County, Oklahoma 2.25 2.10 2.20 ANR Eunice, Louisiana 2.25 2.15 2.25 Columbia Gas Onshore Laterals, (Columbia Gulf) Louisiana 2.35 2.20 2.25 El Paso Natural Gas Pecos/Waha, Texas 2.15 2.10 2.20 Houston Pipeline Anywhere on-system 2.35 2.20 2.25 Louisiana Intrastates2 Anywhere on-system 2.35 2.25 2.30 Natural Gas Pipeline Amarillo Leg Company (non-triangle) 2.25 2.10 2.20 Northern Beaver County, Natural Oklahoma 2.15 2.05 2.15 Northwest Pipeline Opal, Wyoming 1.60 2.00 2.00 Oklahoma Natural Gas Oklahoma 2.30 2.10 2.20 Panhandle Beaver County, Eastern Oklahoma 2.25 2.10 2.20 Southern Natural South Louisiana 2.35 2.25 2.25 Tennessee Gas Pipeline Vinton, Louisiana 2.30 2.20 2.20 Texas Eastern Texas 2.30 2.10 2.15 Texas Gas Zone 1 Transmission (Northern Louisiana) 2.35 2.20 2.20 Transcontinental Gas Pipeline Zone 2 Pooling 2.30 2.20 2.20 Transcontinental Gas Pipeline Zone 3 Pooling 2.35 2.25 2.25 Koch Gateway (Formerly United) Onshore Louisiana 2.25 2.20 2.20 Ozark3 Searcy, Arkansas 2.40 Average All Points 2.26 2.15 2.20 1=Prices as reported to Dynegy Inc. represent our estimates of the median prices for one-month spot transactions at the indicated receipt points. Prices quoted are by industrial end-users and LDCs. Prices are not offers by DYNEGY, or any listed pipelines, to purchase gas. 2=Represents an average of prices on various Louisiana intrastate pipelines. 3=Due to the sale of the Ozark system in August 1998, Dynegy will no longer report spot gas prices for this market.

OGJ Hotline Market Pulse
Latest Prices as of July 7, 1999

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