Commodities Corner
Myra P. Saefong

Feb. 19, 2010, 7:03 a.m. EST · Recommend (1) · Post:
Natural-gas prices settle in for the long haul
Supply outlook good news for consumers, bad news for producers

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But oil and gas rig counts have been climbing recently. As of Feb. 12, there were 1,346 rigs actively exploring for or developing both oil and natural gas in the U.S., up 11 from a week earlier, according to data from Baker Hughes Inc. /quotes/comstock/13*!bhi/quotes/nls/bhi (BHI 49.76, +0.90, +1.84%) .

“We can anticipate some extra [natural-gas] supply to show up sometime soon, or at least supply shouldn’t be a problem this year,” said Ben Smith, president of First Enercast Financial, an information vendor serving energy markets.

He believes that natural-gas prices above $5 should spur new supply to enter the market, while sub-$5 levels could curtail supply.
‘Elephants in the room’

The endless shale potential is just one of the “elephants in the room,” according to Feshbach & Sons’ Feshbach, referring to issues that are often ignored or go unaddressed.

VisMedia

The U.S. also has the second-highest import capacity in the world and perhaps the most storage for LNG, according to Perry.

So one of the “wild cards” for the natural-gas market is all the LNG on the water that’s looking for a home, said Sewell.

Europe and China have been “soaking up all the excess LNG floating around recently,” said Smith. That “may change as soon as winter comes to an end” and if Europe experiences any sort of economic setback, LNG prices there may suffer, sending shipments to the U.S.

Even if prices fall, don’t expect LNG producers to cut back production in the near-term.

“They need the revenue no matter what the price and the U.S. has the most underground storage facilities in the world,” Sewell said.

There have already been reports of LNG tankers being diverted to the U.S. to “take advantage of the storage here and these loads of LNG are being dumped at whatever price they will bring,” said Perry.

“Of course, this does not bode well for natural-gas prices for producers,” he said. “Gas consumers are the ones who should be optimistic now.”
Weather prop

But how can consumers be optimistic when the weather outside is so miserable?

Parts of the U.S. are getting “hit hard with cold, windy weather that boosts gas use in home heating,” said analysts at Deutsche Bank, in a note to clients last week.

In the South census region of the nation where 60% of households use electricity as their primary space-heating fuel, heating-degree days, a measure of energy demand for heating, climbed 13% in January year-on-year, they said.

The Energy Information Administration, in a report issued last week, estimated that January electric-power-sector natural-gas consumption will be at a new record for the month.

“As cold weather and arctic temps continue, supplies will draw down even more,” said Kevin Kerr, president of Kerr Trading International. “Historically, this year will stand out, and EIA [weekly supply] numbers will be invalid or significantly inaccurate.”

But in order to bring natural-gas prices back to the $13 levels seen in 2008, the market would need to see a “prolonged winter and then a quick foray into summer with high temps,” said Kerr.

That quick foray might not even happen.

“The mid-Atlantic and Northeast will probably have a slow start to the summer season as far as warmth,” said Paul Pastelok, a senior meteorologist at AccuWeather.com.

“After a possible flip from a cold ending to winter to a warm up in April, temperatures will cool back off again in May and June to below normal across the Great Lakes, Northeast and possibly mid-Atlantic states,” he said, using a forecast that’s based off a series of analogs he and Bastardi researched recently. And “the usage of natural gas may not be as high this coming year for the central and southern Plains.”

Besides, betting on weather would be pretty risky.

“Gambling on weather is, over time, a sure-fire way to lose money,” said Feshbach. “Sooner or later, the weather always becomes uncooperative.”

Myra P. Saefong is MarketWatch’s assistant global markets editor, based in Tokyo.

Friday, February 12, 2010
Analysis
The Timeless Allure of Gold

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By Dunstan Prial
FOXBusiness

The argument for buying gold during tough economic times is nearly as old as the precious metal itself.

Indeed, when other currencies and commodities are losing their value, the siren call of gold is practically irresistible.

Entire countries have jumped on the gold band wagon of late, with India purchasing 200 tons in November, the single largest purchase of the commodity by a government central bank in three decades. Recent rumors that China is strongly mulling a big purchase similar to India’s have kept the price of gold above the $1,000 an ounce range, according to analysts.

After hitting a record high last month of just over $1,225 an ounce, the price has tapered off a bit, but not by much. It was trading at $1,090 an ounce on Friday.

Gold mining companies such as Gold Fields Limited (GFI: 11.9, 0, 0%) and Newmont Mining Corporation (NEM: 46.54, -0.26, -0.56%) have also benefited from the recent surge.

First, though, a little perspective is in order. The current price of gold is still well below its value three decades ago when inflation is taken into account. In 1980, gold hit a then-record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator.

Still, the shift in investors’ attention toward gold during the recent economic crisis has been dramatic.

Here’s commodities expert Kevin Kerr explaining gold’s allure: “Gold is attractive for investors for the simple reason that it is a comfort commodity. Much like a bowl of warm soup on a cold winter day it makes us feel warm and secure inside. Let’s face it, as the fiat currencies around the world get beat up each week, gold is one of the few places investors can put their money and not watch it whither.”

No argument here. But after a months-long runup since October 2008, when gold cost about $700 an ounce, the question is whether gold is a bubble that’s about to burst.

“No way,” says Kerr. “We’re just getting started.”

His entirely plausible reasoning is that investors will continue to turn to gold as the Federal Reserve – and other global central banks – struggle to pull back from the liquidity and stimulus programs that prevented the world’s economy from falling off a cliff.

“The bottom line is that gold will simply become more and more attractive as it becomes clearer and clearer just how bad a pickle the Fed is in. They simply cannot raise (interest) rates,” Kerr said.

The combination of easy credit fueled by low interest rates and rivers of stimulus money flowing from the coffers of various central banks is bound to lead to “hyper inflation,” and Kerr believes gold is the obvious hedge against that dynamic.

But there’s no reason to panic or go gold crazy.

Kerr recommends dedicating no more than 10% of an investor’s portfolio to precious metals. Given the precarious state of the world’s economy, he recommends leaning toward the higher end of that range at the moment.

Like any good investment argument, however, there other points of view.

Billionaire investment guru George Soros, in an interview last month from the World Economic Forum in Davos, Switzerland, described gold as “the ultimate asset bubble.”

Soros was ambiguous as to whether he felt gold was a bubble about to burst or one still rife for expansion Nevertheless, his point was pretty clear – investment trends come and go (Think dotcom companies and real estate in just the past decade.) but gold remains constant.

Seemingly unspoken in Soros’ statement at Davos was that what goes up must come down. Investors need only to look at the price of oil 18 months ago as it soared above record highs to nearly $150 a barrel.

The argument at the time was whether speculators had helped push the price up or whether supply and demand alone had created the surge. (A lot of both factors contributed, actually.) Eventually, as demand weakened and supplies of oil built up the price plunged to below $40 a barrel.

There is little doubt that gold will eventually hit a ceiling once the economy shows more sustained strength and interest rates start climbing higher.

As with many investment dilemmas it really comes down to timing: when and at what price will the gold rally end? No one knows, of course.

With central banks holding interest rates near zero, and Europe on the brink of bailing out Greece, gold remains a good investment as a hedge against inflation. And with additional risks lurking on the horizon in the form of Spain, Portugal and Ireland, risk-aversion will remain at the forefront of investor thinking.

So don’t expect an end any time soon to the current gold rush.