Natural Gas Prices Expected to Remain Firm

February 17, 2004

By: Lisa Sanders

 

DALLAS (CBS.MW) -- Americans who heat their homes with natural gas should prepare for a chilling effect on their pocketbooks through the rest of this winter and possibly beyond, experts say.

 

An expanding economy and mounting demand from U.S. power plants has some analysts predicting prices could rise 50 percent or more in the year ahead. One projects a tripling in price for one of the world's most volatile commodities by late next year.

 

In December, natural-gas futures jumped to $7 per million British thermal units before settling into the $5.50 range. Prices spiked to a record $11.89 last winter as inventories dwindled, up from a year-earlier low of $1.96.

 

 "If temperatures continue to stay cold, prices should push back above $7, possibly even higher," said Phil Flynn, senior market analyst at brokerage house Alaron.com and among those predicting a new record high in coming months. "Our economy continues to expand, but production isn't keeping pace with demand."

 

 Federal Reserve Chairman Alan Greenspan advised House and Senate leaders last year that natural-gas prices were putting the squeeze on U.S. businesses, and he didn't see a return to low prices anytime in the near future. Indeed, chemical and fertilizer companies, which use natural gas as a fuel source and a component in manufacturing, have felt the hurt most keenly. See story.

 

 Where's demand coming from?

 

 While combined demand from commercial and residential users -- at about 8.2 trillion cubic feet a year -- exceeds power-generator and industrial-consumer usage, growing power-plant consumption has crimped supply.

 

 "We've been on a tear the last five years or so building electrical-generation capacity - we increased total U.S. capacity by something like 20 percent," said Joe Dancy, a professor of oil and gas law at Southern Methodist University in Dallas. "About 95 percent of that incremental capacity is natural-gas fired."

 

 Dancy, who cites North American production declines and diminishing imports from Canada for the price squeeze, sees the situation as dire and not specific to the winter months. He predicts natural gas could spike to $15 per million BTU in the next 12 to 18 months.

 

 "Since natural gas use for heating is so tied to the weather - and weather is an inexact science, you can only say the probability is high that we will see spikes -- maybe much sooner than we think," Dancy said.

 

 "If we get past this winter without a spike, a hot summer will cause a lot of the new natural-gas fired turbines to come online -- and the natural-gas "peaking plants" will also fire up." (Those plants run only in periods of peak demand when air conditioners are a major draw).

 

 If natural gas is burned for electricity in the summer, when it's usually being stored for the winter, prices could spike, Dancy said. "It is not a short-term problem that is easily solved. It could impact economic growth in the U.S. quite negatively."

 

 While most analysts are bullish on prices, at least one suggested the market might get caught in a "bear-trap." Volatility Managers President Tom Lord predicts prices could dip to the low-$4 range by May, and he doesn't see them rising beyond $6 in the long term.

 

 "We've gotten into February now, and utilities are at the point that, with the remaining storage we have, they're comfortable they can make it to the end of the year," said Lord, whose Colorado firm advises clients on how to control the impact of volatile gas markets on earnings. "They won't be as anxious to buy flowing gas in average weather."

 

 On Thursday, the Energy Department reported U.S. natural-gas stocks fell to near their five-year average of 1.6 trillion cubic feet in the week ended Feb. 6. That's down from 2.1 trillion on Jan. 23, but more than double the 650 billion cubic feet when prices hit their all-time high.

 

 

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