Just when the North American natural gas market was in danger of becoming boring, it begins to test the consensus $5/MMbtu floor.
Supply concerns and, to a lesser degree, recovering demand have put near-term price projections for natural gas in the US at $5/MMbtu or above for months now.
Helping to keep a prop under those expectations have been soaring oil prices. New York benchmark futures crude came within a whisper of $50/bbl in recent weeks, enlarging the the crude-to-gas premium.
Meantime, a robust gas storage injection rate has helped keep the 12-month futures strip a bit less volatile than might have been expected 6 months ago.
Price weakness
But analysts are struggling to divine what lies behind the recent spell of gas price weakness.
Certainly one factor is the sluggish rate of demand growth in an unseasonably cool summer—which in turn contributes to the sustained robustness of storage injection rates.
Temperatures for the cooling season to date have been 2% lower than normal and 7% lower than last year, notes UBS Investment Research analyst Ron Barone, in a Sept. 2 report.
Weather has been a bearish factor on the supply side as well. Even after the threat of two major hurricanes and a third on the way—all targeting mainly Florida—Gulf of Mexico gas production thus far has been little affected.
Storage remains on track to reach a record 3.3 tcf by the Nov. 1 start of the heating season; the current level of storage is 7.3% above the 5 year average and 11.4% above last year's level at this time, according to Ohio energy economist James L. Williams of WTRG Economics: "To reach the highest storage level on record, the US needs to add 559 bcf by the end of October. That requires injections of only 60.2 bcf/week, which is identical with the 5 year average over that period and easily within the capability of the industry, given current levels of drilling activity."
Oil prices, the other key driver for gas prices, have backed off their march through the crucial watershed of $50/bbl, as supply concerns in Venezuela, Iraq, and Russia have eased.
Contending that there is a $6-10/bbl supply risk premium in current oil prices, Williams noted in a Sept. 3 report that a $6 drop in spot oil prices would cause gas prices to fall by $1/MMbtu. He says he expects gas to drop to a $3/MMbtu differential below crude, whittling spot gas to a $4.65/MMbtu floor.
That compares with analysts such as Strategic Energy & Economic Research Inc.'s Ron Denhardt, who puts September-October spot gas at $5.20/MMbtu, and Merrill Lynch's John Herrlin, who sees gas prices at $5-5.25/MMbtu through 2005.
Bear report
Such price projections still would keep gas's floor close to what has been a consensus forecast of $5-7/MMbtu for the near to middle term.
But one contrarian analyst sees a more bearish outlook for US gas. Steven Parla, analyst with New York-based research firm Foresight Research Solutions LLC, questions the popular wisdom that the mild summer weather has been the only thing to undermine gas prices. He notes that if the oil-gas price ratio were still being maintained at its January level, gas prices would be $7-8/Mcf.
"U[W]e suspect there is more behind the recent gas price delinking from crude than a cool summer, particularly since this disconnect is not solely due to crude strength but also the result of noticeable absoluate natural gas price weakness," he said in an Aug. 23 report.
Parla cites stabilizing overall supply levels, including increased LNG imports; continued demand destruction even with robust 2003 economic growth; and slowing economic growth. He also questions forecasts predicting a 3-5% US gas production decline this year and points to recent data showing Texas gas output as recently up 400 MMcfd on the year and at its highest level in 5 years.
Parla instead thinks that while the market remains tight, it has adjusted, finding a new supply-demand equilibrium for the time being. That range could be $3.75-5.50/Mcf, a level threatening the current level of the futures strip for the coming winter.
Still, it's a safe bet that any producer who remembers the $1-1.60/Mcf of the gas bubble years probably will take it.
(Online Sept. 7, 2004; author's e-mail: [email protected])
