Rigzone: NG may hit $15 by year end, analyst says some areas "will likely see gas lines"

Natural gas prices, which reached a high of $12.25 in futures trading Wednesday, could hit $15/MMBtu by the end of December, predicted analyst Philip Verleger, a visiting fellow at the Institute of International Economics and former director of the Office of Domestic Energy Policy at the U.S. Treasury Dept.

"My guess is the coming squeeze will equal or exceed the one in 2002," he said in a written report on Hurricane Katrina's impact on Wednesday. "In that year spot natural gas prices increase by 60% between August and the end of December. This year we can expect a similar if not larger increase."{...}

The worst impact may be on gasoline prices, however, due to the refinery outages from Katrina and apparent consumer insensitivity to cost, he said. "Do I believe retail gasoline prices will reach $10? In a word 'no.' However, I also do not believe the market will clear. Some parts of the country will likely see gasoline lines."

Verleger, a former Yale professor and vise president at Drexel Burnham Lambert, predicted "very severe economic impacts" from Katrina because it will "force consumers to increase expenditures on energy drastically.

Anyone seen anything on heating oil predictions/discussion?

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I'll just point out that $15 natural gas may be this guy's opinion, but the market disagrees. Natural gas for December/January delivery is in the $11.90 - $12.15 range, not $15. And prices fell today about 20 cents.

As far as heating oil, I haven't really been following that, but the near term contract has gone up from about $1.85 last week to $2.05 today. Prices are then predicted to rise somewhat up through the Jan/Feb time frame to about $2.10. This is compared to last year when they were about $1.50.

I like http://futures.tradingcharts.com/marketquotes/ as an easy to use source of current futures prices.

I am a futures trader.

The fellow discussing 15$ may be spot on, or way off base, but his opinion remains valid.

Futures prices do not "forecast" prices in the future, not in the sense I believe you may thinking. To some degree futures do anticipate what may happen down the road. For example - winter futures prices for NG will always be higher than late spring prices. The "future" price changes as buyers and sellers compete with their own understanding, beliefs and expectations.

Like all markets, in any futures market, price trends form as higher swing highs and lows are set (in an up trend) or lower swing highs and lower swing lows are printed on the chart (in a down trend). Traders live and die by their ability to detect when price is trending, when it is not, and the strategies they employ to exploit the direction / presence, or lack thereof, of trend.

When price starts off with higher swing highs and lows, and continues higher, you can expect higher prices in futures contracts down the road.

Will we? Its entirely possible.

Consider this: NG prices have never been at these levels in the summer.

Prices we see today typically show up only in Nov/Dec / Jan/Feb, depending on weather and supply.

Whether or not the analyst quoted in the article is a trader, he is on the right track. All that is needed for his opinion to become reality is a) a continued tight gas market and b) cold weather.

"a" seems to be upon us already, even before the impact of Katrina, "b" is a total unknown.

Having said all this, I have to say that NG prices have run up so far and fast that the typical price reaction - all these other factors (hurricane, supply etc) aside, we'd normally see profit taking create at best a pause and retracement of some sort, or at worst a complete reversal.

Given the underlying issues in the North American NG market - for all intents and purposes a domestic market (no OPEC to the rescue here) - we can expect that any reversal here - even if sharp for a period of time - is very likely to be short lived and these high prices will be seen again.

At that time, as traders test the waters, price may then head higher.

The worst case outcome: price barely moves down and in fact uses the recent gap as a launch pad for another leg up. I've seen this happen in other runaway markets.

Ultimately price will get so high that serious problems hit the economy and price will then crash, but frankly, what are people going to do - freeze to death? Or put off buying that Xbox at Christmas...?

Recession is the outcome if prices head higher, bank on it.

I would say that futures prices do in fact "forecast", um, future prices. They let you "lock in" the current trading price. If you think NG will be $15 in December, why not buy today for $12? That's right, anyone can contract today for December delivery for about $12. This gives you protection right now against the chance of natural gas rising to $15. On the down side, it forces you to pay that $12 even if there is a reversal and gas falls back to $10 or less. But the fact that you can lock in the futures price today means that it really does reflect the market's best opinion about what things will be selling for in December. Why else would someone today promise to deliver it then for that price?
I meant to add: price spikes in the summer, at these levels are in part due the high cooling demand (electricity production) as well as economic growth (demand increase).

But oil is also a major factor in NG pricing via the NG:Oil BTU ratio effect. The BTU content of each fuel, expressed as a ratio, has a fairly direct relationship to the price of NG.

This happens, in part, because its a convenient way to look at the 'value' of the fuel, but also because some industrial users (and electricty producers) are "dual fuel" capable -- able to switch between oil or NG depending on which is cheaper per BTU output.

Therefore, if oil stays high or higher, NG will tend to as well.

But the laws of supply and demand are not thrown out simply in favour of a ratio. If weather is mild, electricity demand does not overly lean on gas , and stocks remain high - NG will come in somewhat lower despite what oil does.

Something I've been thinking about is the probability that New Orleans gets hit again by another hurricane before they finish rebuilding the city from this one. There's been at least a couple of near misses (Ivan, Dennis) before Katrina. Hurricanes have been more common in the last few years, and are likely to continue to get more powerful due to global warming (see here, and this paper by K. Emanuel. That second link is particularly important:
Theory and modelling predict that hurricane intensity should increase with increasing global mean temperatures, but work on the detection of trends in hurricane activity has focused mostly on their frequency and shows no trend. Here I define an index of the potential destructiveness of hurricanes based on the total dissipation of power, integrated over the lifetime of the cyclone, and show that this index has increased markedly since the mid-1970s. This trend is due to both longer storm lifetimes and greater storm intensities. I find that the record of net hurricane power dissipation is highly correlated with tropical sea surface temperature, reflecting well-documented climate signals, including multi-decadal oscillations in the North Atlantic and North Pacific, and global warming. My results suggest that future warming may lead to an upward trend in tropical cyclone destructive potential, and--taking into account an increasing coastal population--a substantial increase in hurricane-related losses in the twenty-first century
There's still quite a bit of this year's season left, and then there's next year. It seems to me the risk of the city getting hit again soon with something not too much less than Katrina cannot be neglected. That's particularly true given that when you are on a rising trend for something like hurricane destructiveness, new record events will occur quite regularly. See this nice explanation at RealClimate.

A second event of comparable scope within two or three years would conclusively render the city uninhabitable in my view.


Absolutely right. The National Oceanic and Atmospheric Administration says that this may be the worst hurricane season on record; 9 of the past 11 years are above average; there may be another decade of above-normal actitivites. And that's the assessment from people who don't think gloabl warming has had much effect yet.

I've had the same thought.  The chances of a direct or near direct hit this year may be slim, but a category 3 or 4 hurricane that glances NO could undermine reconstruction with more flooding and wind damage.  
Some more bad news Nigeria may be striking

Nigeria, where the main workers' union threatened a strike, saying proposed fuel price hikes by the government of the world's eighth-biggest crude exporter were unacceptable.

Snip from Ruters UK

They often threaten to strike but every now and then they do. What is worse is the Oil from Nigeria is sweeeeeeeeet light.

Refinery insider comments:

 ``I've never seen anything as devastating to the refining industry,'' said Dan Robinson, president of Placid Refining Co., a closely held company. ``There are a number of refineries that have suffered significant damage due to flooding and water, and those that were flooded, I presume, will have a considerable amount of work to do to get their plants running again.''


Hey MW, I'm curious about future traders and have a quesiton. Are future traders to blame for the high price of gas?? I have various discussions with people and some say oil companies are not to blame as they just sell and buy from the futures markets.. True or not?? I would like to know..
I'm going to talk more generally about hedging and speculation - it applies to gas, NG, oil, cotton, whatever. But lets first not blame this on the oil companies... there are plenty of oil production companies that have no "gas pumps".... people are buying their 70$ barrels of oil as readily as Shell and the other integrateds buy and sell theres. The overall issue is demand, which is the supporting backdrop that allows the market to lean back on rising support (of price).

Hegding does influence prices, but most oil companies are hedging against DECLINES in prices, which means they are SELLING future contracts, in order to lock in gains.

When there is more SELLING pressure than BUYING pressure, prices go DOWN.

That's a bit simplistic, but in general, we could probably walk away assuming that hedging programs by oil and gas PRODUCERS are not themselves pushing prices higher.

Lets not forget there or hedgers on the CONSUMING side.

Industrial users,
Fuel wholesalers,

Most of the big users of petro-chemical / fuel products have hedging programs - they are buyers, and are protecting againt price increases - the other side of the coin.

And then, somewhere in the middle of all this, you have speculators.

There are those that try to identify the impact of the pure speculators -- those that will never take delivery of the product and are there just because its a big market to trade -- but surely there is far more speculative activity now than five years ago.

My take is they do add something to the price premium but I rather doubt they are as big a factor as some think. Regardless... it doesn't matter... price is the price. WHen it gets too high, according to the concensus of the herd, sellers come in and price heads lower. And vice versa.

The last few years various reasons (other than the obvious) have been given for why price has continued to trend higher and in my view, none of them are satisfactory. First it was the terror premium. Then Iraq. (not these are almost never talked about these days).

The only one that really makes sense is supply and demand, and the expectation that the balance is getting tighter. If these are not the peak oil times, its a good preview of what it will look like.

In the short term -- news often creates "spikes" and this price increase may be a short term spike and the high of the year, soon to come down... but only if they get substantially all the refineries back on line quickly.

(or a fleet of gasoline-laden supertankers shows up on our doorstep asap)

Here's a possible way to consider how speculators affect the market. If a speculator makes money, it's because they were right in predicting if the price was going to go up or down. When they placed their wager, they influenced price a bit, in the direction that they bet it was going to go. Since prices in the spot market eventually moved in that direction, this had a stabalizing effect on the price (preventing a sharp spike, which might have over shot the sweet spot).

When speculators lose money, it's because they bet in the wrong direction and thus were a bit of a destabalizing effect upon the price. In short, one can rationalize it as if speculators are making money they are actually providing a bit of a service to society. If they're not making money they're providing a disservice. But the people who continue to speculate are going to be the ones who haven't lost their investment money, and thus for the most part speculators are a good thing.


Here's a source from NOAA expressing much more skepticism.

"One critic, Chris Landsea, a research meteorologist at NOAA, said there was no evidence that the hurricane activity of recent years was dramatically different from the last century.

"The last few years have been busy (with hurricanes), but the 1930s to 1960s were much more destructive (as measured by wind speeds) than the last 10 years," Landsea said. "That points to the conclusion (that) we're not seeing more destructive hurricanes. I wouldn't claim there's no global warming influence on (hurricane) activity, but I would agree that any such global- warming influence will be pretty small in the future."


Without any substantial import options like oil, I think NG prices could spike even worse than that, especially if the balance of this recharge season is lost coupled with a normal to colder than normal winter.  Remember, LNG is not a big player domestically, nor will it be any time soon (if ever) so we live--and die--off of continental reserves.  If we have failed to sufficiently recharge stored reserves and experience a strong drawdown that approaches or surpasses the system's limitations to keep sufficient pressure, the sky is the limit in terms of prices.  

Large scale users may be cut off.  I have been pestering the gas company officials on this subject and never seem satisfied with the responses I receive.  Its concerning.