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.

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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.