The chorus is getting louder for a secular change in US gas markets.
Several speakers at an Oct. 4 Houston forum pointed to the growing confluence of factors that would underpin an up cycle for the US upstream industry being sustained for several years.
Jim Lightner, chairman, CEO, and president of Tom Brown Inc., predicted that gas price volatility would continue "but from a higher platform" than where it is today. His view was echoed by other speakers who see a US drilling recovery paced by a tightening gas supply-demand balance that is driven as much by slumping US production as it is by growing gas demand.
That squeeze is being exacerbated by a current reluctance among US and Canadian operators to spend increasingly scarce cash flow for drilling wells, even though oil and gas prices today "represent the best of all possible worlds" for producers, according to Lehman Bros. analyst James Crandell, also a speaker at the forum. The 16th biannual oil field breakfast forum was sponsored by Resource Marketing International and Randall Morton International Inc., both of Houston.
A 'step change' ahead?
Over the past 7 years, US gas markets have undergone two major "step change" transformations, contends securities analyst Marshall Adkins, of Raymond James & Associates Inc., St. Petersburg, Fla.
He expects a third such step change to occur this winter.
The previous two step changes were triggered by winter gas demand exceeding supply. The result in both cases was a major price spike and natural gas storage ending the heating season far below comfort levels. From the industry collapse in 1986 to 1995, US gas prices averaged a paltry $1.65/Mcf—the time of the infamous gas "bubble" that later turned out to be a "sausage."
The surge in demand during the winter of 1995-96 caught industry unawares and drove gas prices to an average of $2.35/Mcf—where they stayed for another 4 years.
The next step change came in winter 2000-01, which saw another spike that lingered and resulted in prices being sustained at an average of $3.70/Mcf for 3 years.
This winter's spike
Adkins contends that US gas supply this winter will fall short of demand by 3-10 bcfd. Assuming normal winter temperatures and that storage will need to end the heating season at a level of at least 700-800 bcf, he claims that gas prices will have to jump high enough to squeeze at least 1 tcf of demand out of the system this winter.
While switching to distillates will reduce the pull on gas, it won't happen in a meaningful way unless gas prices are sustained well above $5.50-5.75/Mcf this winter, Adkins says, noting that there could be brief spikes double that level with a weather-related demand spurt.
Although all of the data he cites point strongly to gas prices above $5/Mcf this winter, Adkins offers a forecast of gas prices averaging $4.25/Mcf in 2003, "recognizing there is a substantial amount of conservatism built into such a forecast."
Noting that the previous two step changes were demand-driven and that the step change looming this winter is supply-driven, Adkins said, "Because supply problems are much more difficult to correct than demand problems, it is likely that these higher prices will be much more sustainable through the summer months than they were following the previous natural gas shortage." That's a much more bullish price forecast than what the Wall Street consensus seems to be.
Caterpillars and malamutes
Of course, secular change or not, temperatures will still be the main determinant in the extent of gas price increases this winter.
Meteorologists offer a mixed view of weather this winter: colder than normal in some areas, warmer than normal in others, and normal elsewhere.
Perhaps it's time to turn to less scientific weather diviners, such as woolly caterpillars. The OGJ news desk has an equivalent: the number of press releases from gas utilities warning consumers of cold weather and likely price spikes (There's a strong crop so far this year, and the heating season is almost a month away).
Here's a personal woolly caterpillar predictor equivalent: My Alaskan malamute's appetite is growing, and she wants outdoors more often at night.
In Houston, even in October, that's saying something.
(Online Oct. 4, 2002; author's e-mail: [email protected])
