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Natural Gas and the Bulls of Summer

 

Natural gas futures prices have just fallen below the psychological threshold of $4.00 per thousand cubic feet. Prospects for continued gas supply growth reflected by weekly increases in the number of rigs drilling for natural gas coupled with moderating temperatures across the eastern half of the country and recent government data questioning the pace of the current economic recovery are weighing on gas traders. Just recently, one of the leading Wall Street bulls arguing for higher natural gas prices traded in their horns for a set of bear claws as they not only cut their price expectations from $7.50 to $6, but they suggested this lowered price may last for years. Ouch! 
 
Traders of gas futures have been holding out hope for sharper declines in the gas-directed drilling rig count in the face of weak prices all year, but that prospect has been overwhelmed by the need of gas producers to drill wells to hold recently purchased leases in the prolific gas shale provinces around the country. Traders’ last hope for higher near-term gas prices was hurricane activity in the Gulf of Mexico. So when the latest hurricane, Danielle, turned up into the Atlantic Ocean rather than targeting the Gulf of Mexico, that hope of higher prices was lost.
 
The latest blow against higher gas prices, and with potentially longer term significance, was the release Monday by the Commodity Weather Group, LLC (CWG) of its latest forecast calling for a significantly warmer winter than last year. In fact, CWG is now forecasting that the upcoming winter could be the warmest since 2006-07. That thought does not warm the hearts of gas traders. In 2006, gas prices were cut essentially in half between early January and early July, dropping from $10.63 to $5.50. By late August 2006, gas prices had rallied back to just over $7 in hopes of an early and cold winter. By the beginning of January 2007, gas prices had fallen ten percent from August as winter temperatures proved disappointing. Prices recovered to the upper $7 range in early 2007 as a cold snap revived demand hopes. 
 
If that 2006-07 price pattern were to be repeated, we could be looking at gas prices in the dead of winter below $4, which would certainly not be good for gas producers and the service companies who support them. Low gas prices would be coming just as the drilling surge of the past 18 months will be running out as the acreage land rush has ended. Until economic activity recovers boosting industrial gas demand and coal prices climb to levels that encourage utilities to switch to generating electricity from gas-fired power plants, the natural gas industry will continue to wallow in a world marked by oversupply and weak prices. That will certainly put a damper on the Houston economy this winter. Coal in our stockings this Christmas?