November key to natural gas prices, analyst says

With natural gas futures contracts trading for more than $5/Mcf, analysts say November will be the month to watch, now summer demand is passing its peak. If it appears the weather will be warmer than normal, prices could pull back from the $5 level, says Michael Schmitz, an analyst with SalomonSmithBarney, but prices could also spike higher if the weather turns cold. As prices rise, the Natural Gas Council called for a joint meeting between the US and Canada to discuss the supply situation.

Kate Thomas
OGJ Online

With natural gas futures contracts trading for more than $5/Mcf, analysts say November will be the month to watch, now summer demand is passing its peak.

If it appears the weather will be warmer than normal, "we could see prices pulling back" from the $5 level says Michael Schmitz, an analyst with SalomonSmithBarney, New York. But if it turns colder, gas prices could spike even higher, he says, with gas storage still at a low level.

"People are starting to realize there's only 10 weeks left in the storage season," he says, and "they are running out of time." Moreover, deliverability is still down, pressuring prices higher.

The October natural gas contract on the New York Mercantile Exchange closed Tuesday at $4.95/mcf�the highest near-month contract close ever. The December contract closed at $5.11, also a record.

As prices move higher, industry leaders are growing worried about the political implications. In a letter to President Clinton Sept. 1, the Natural Gas Council, a joint group representing five industry associations, asked for increased funding for low-income households to pay their gas bills this winter and for a joint meeting between the governments of the US and Canada.

With nearly 14% of US gas imported from Canada, the council said a dialogue between the two countries should be held to gain a better understanding of the supply situation.

High prices also suggest traders were expecting weak numbers when the American Gas Association (AGA) releases its weekly storage figures today. For the week ended Aug. 26, the industry injected 52 bcf, compared with 69 bcf for the same period a year ago, and 57 bcf in 1998. Overall, the amount of gas in storage is roughly 15% below 1 year ago.

The gas storage situation has begun to catch the attention of state regulators. With less gas in storage, pressure will mount on the interstate gas pipeline system to deliver more gas, says Mike Kidd, director of the gas services division at the Michigan Public Service Commission.

Michigan typically cycles more gas in and out of storage than any other state, with about 66% of gas consumed in the state on a peak winter's day delivered from Michigan storage inventories. Last year, about 92% of Michigan's industrial and 42% of commercial customers bought gas directly from pipelines, brokers, or producers. Most residential customers buy gas from their local utility at rates regulated by the commission.

Kidd says some marketers were postponing gas purchases earlier in the summer in the expectation that gas prices would decline. Buyers hoped to avoid paying the carrying cost of gas in storage.

"I think a lot of folks felt prices might soften up and come down," he says. As a result, commercial and industrial customers relying on interruptible pipeline capacity could experience pipeline delivery difficulties this winter, he says.

"If we have a really cold winter, some customers without firm capacity might have to shut down plants," Kidd says. Others might be able to obtain alternate fuels. Some buyers may be hoping the new Vector pipeline might also be sufficient to prevent deliverability problems in the coldest winters months, he says.

While prices may be hitting new highs, Enron Online, Enron Corp.'s internet-based trading unit has not experienced a spike in volume over the past week, says Eric Thode, spokesman.

"We haven't seen any extra activity," he said.

Lehman Brothers analysts Thomas R. Driscoll and Jeffrey Robertson are projecting natural gas prices could surge to $6-7/MMbtu potentially forcing inter-fuel competition with more expensive No. 2 heating oil.

They say high prices have already hurt demand, reducing consumption by an estimated 2 bcf/day in June, July, and August.

"We believe that a decrease in demand resulted from higher prices and freed up an additional 2-3 bcf/day that was then injected into storage," the Lehman Brothers analysts say.

If the upcoming winter heating season opens with just 2,650 bcf in storage, the gas markets will be in trouble, if not this winter, then certainly in 2001, says Marshall Adkins, a analyst with Raymond James & Associates Inc., Houston, in an analysis of the market.

On average, the withdrawal season has opened with about 2,900 bcf in storage for the past 5 years and drawdowns have averaged about 2,000 bcf of that storage, he says. That means there is the prospect of beginning next year's injection season with just 600 bcf of gas in storage.

Under this scenario, gas prices would likely explode, Marshall says, marginal gas users would be shut down, while the supply-demand equation would be forced to self-correct through reduced consumption.

This means, in Adkins's view, US natural gas prices should be sustainable above $4/mcf for "years to come."

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