Price outlook remains bullish as natural gas climbs past $4

Analysts have been anticipating premium natural gas prices this summer, but the Henry Hub June futures contract on the New York Mercantile Exchange jumped ahead of schedule by closing above $4/MMbtu Wednesday. The contract settled at $4.073 and was still trading well past $4 the following day�close to $4.10/MMbtu on Thursday morning but approaching $4.20 in the early afternoon.


Karen Broyles
OGJ Online

Analysts have been anticipating premium natural gas prices this summer, but the Henry Hub June futures contract on the New York Mercantile Exchange jumped ahead of schedule by closing above $4/MMbtu Wednesday.

The contract settled at $4.073 and was still trading well past $4 the following day�close to $4.10/MMbtu on Thursday morning but approaching $4.20 in the early afternoon. Analysts say they expect prices to remain bullish this summer, thanks to short supply due to lack of additional US production and strong demand, as utilities and marketers vie with new power generation capacity for gas supplies.

Analysts at Houston-based Raymond James & Associates Inc. had already forecast $4 gas for this year's third quarter and $4.30 gas during the fourth quarter. The fact that the NYMEX gas contract for June and the forward months have already surpassed the $4 level indicate "how extremely anticipatory that commodity markets have become," says John Gerdes, an analyst who follows the exploration and production sector for Raymond James. That trend can also be seen in the US stock market.

Gerdes says the gas market is underbalanced in terms of supply and demand on a daily basis. Supply is lagging behind the growing demand from new power generation, which has been rising 3%/year for the past 12-15 years. And with the level of gas supplies coming from Canada expected to remain flat, supply shortfalls and volatile price movements will likely continue.

Gerdes estimates that supply in storage will be about 500 bcf below 2.9 tcf, a historical average for the beginning of the withdrawal season, by Nov. 1. While this past winter was warmer than unusual, the dissipation of La Ni�a after this summer could mean the US will be facing a cooler winter with less supply, Gerdes says. A return to normal temperatures would increase demand in the commercial and residential sectors, which could increase prices drastically.

Market shifts
In the past, power generators and utilities usually were the only market looking for gas, which they injected into storage to meet wintertime demand, says Dave Purcell, energy analyst with Houston-based Simmons & Co. International. But with new power generation coming on line, particularly in the US Northeast, and a hot summer forecast this year, demand for electricity has increased, which also will keep upward pressure on gas prices. Coal-burning generating units generally don't have excess capacity during the summer months, and this will exacerbate the problem.

However, industrial players that consume large quantities of gas in their production processes�including the steel, petrochemical, and paper industries�could feel the effects of higher gas prices more than power generators, if prices rise enough. "I'm not sure what the threshold is, but it's a concern," said Purcell.

Unlike the wholesale market, a large proportion of the power market is still regulated at the residential level, which could allow power generators to pass the higher costs of fuel along to their customers. That will change as more state open up their residential markets to competition in the power sector.

Even with 650 rigs drilling for gas in the US and a strong rig count since last year's fourth quarter, noticeable gas production growth hasn't been achieved, says Purcell. Increasing production under current conditions would be very difficult, given that production per-well is declining 40% or more in some producing areas.

Increasing the rig count and amount of dollars being spent on E&P are the only ways to achieve that growth, Purcell says. Whatever happens, prices aren't likely to fall back below the $3/MMbtu level during the next year or two.

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