Giving Natural Gas Some Horns

Written By Keith Kohl

Posted January 10, 2007

Baltimore, MD-Natural gas prices have taken a hard hit this year, but the future may make you rethink any ideas of leaving early.

Throughout last year, the thing I least expected was such a degree of calm in natural gas.

Fresh off the heels of the worst hurricane season in my lifetime, I admit I did anticipate some similar tragedy. So I waited . . .

 . . . and waited.

Yet as the days turned into months and the amount of gas in storage continued to increase, prices just dragged along.

So what happened that hurt natural gas in 2006?

The Winter That Never Was

Several circumstances kept natural gas prices stagnant. Or rather a lack of circumstances.

The most significant absence was winter. The warmer-than-usual weather has allowed prices to remain at lower levels, causing supplies to grow larger than normal.

Also missing last year compared to 2005 was a hurricane season. Katrina’s devastating effects the year before skyrocketed prices past $12 per thousand cubic feet, double the price of six months before. Just try to remember one hurricane story that made it to the news in 2006. Don’t worry, neither could I.

As a result, there was a spike in U.S. storage levels this past summer, meaning more reserves for this winter. With higher levels, natural gas producers are forced to either lower their prices further or slow production . . . both options they would like to avoid.

In 2006 U.S. industry repaired the extensive oil and gas infrastructure damages from the 2005 hurricane season. This has allowed the U.S. to finally begin increasing production, further raising natural gas inventories.

The tide, however, is about to turn.

Although temperatures have been consistently warmer than last year (more specifically the last 25 straight days), meteorologists are predicting that the cold weather will finally start moving down from Canada.

But weather isn’t the only thing that can go wrong. There are a myriad of factors that can affect this volatile industry.

A Future in Question

According to the EIA, global natural gas consumption will rise from 95 trillion cubic feet in 2003 to 182 trillion cubic feet by 2030. Not only will it come close to doubling, gas has the second fastest growth rate at 2.4% (coal is first at 2.5%).

In fact, natural gas could be a contender to take over oil’s throne.

At last year’s conference in June 2006, Stephan Ewing, chairman of the American Gas Association (AGA), stressed the potential problem facing the industry. "Demand growth, supply constraints and the resulting high and volatile prices are our biggest challenges in the United States. What we are producing and what we are capable of producing are in lockstep. No longer can increased demand be met by opening a valve a few more turns. The valves are wide open."

The AGA also concluded that projected demand up to the year 2020 will require nearly $100 billion for 255,000 miles of new distribution infrastructure.

Any failure to meet demand will cause price spikes. Not to be forgotten are emerging economies like China. According to 2005 data, China’s GDP growth rate was an astounding 10.2%.

 

 

Clearly the price of oil is closely tied to other energy sources, and as it increases steadily year after year, an inevitable shift occurs to coal and gas.

If you couple this with the fact that China has the world’s largest predicted growth rate for industrial natural gas consumption, then it only makes sense to expect that natural gas prices will rise with the new demand.

If natural gas were a stable market, I would be slightly worried, but the truth is that the volatile nature of the oil and gas industries will inevitably cause prices to escalate.

All’s Well That Earns Well

 At first glance, the flat prices that dominated 2006 might make a typical investor hesitant about moving into or out of natural gas . .


. . . or would they?

If one thing has become clear over the last three, it’s that the oil and gas industries are fraught with insecurity. So many factors can influence natural gas without even a hint of warning.

Yet we are on the brink of another surge by oil and gas, sparked primarily by the impending drop in temperatures.

In fact, as this is being written, natural gas prices have jumped to $6.68 (+0.307) while oil has stayed just above the $55 per/bbl mark.

The time is still ripe to get into natural gas and take advantage of the sluggish price that has fluctuated throughout the year.  Just remember that by waiting any longer and you’ll soon find the volatility factor has struck.

Until next time,



Keith Kohl

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