SAN FRANCISCO (MarketWatch) — As the winter season draws to a close and the energy market readies for a slowdown in the need for heating fuels, natural-gas prices should be falling. They’re not.
Instead, prices have climbed over 9% month to date, with the market betting on a tighter supply and demand situation following a cold winter season, signs of a recovery in the U.S. economy, a drop in drilling rigs, growing uses for the fuel, and a shift away from coal-fired plants.
‘Natural gas is like a sleeping giant, waiting to be awakened.’
“Demand on a massive scale is coming,” said Kevin Kerr, president and chief executive offer of Kerr Trading International.
“Supplies are getting tighter and demand is increasing,” he said, and that’s likely to happen dramatically in the next five years as new technology and usage comes online. “Natural gas is like a sleeping giant, waiting to be awakened.”
On Thursday, prices got a good shake, with April natural gas jumping nearly 4% to $3.81 per million British thermal units, the highest settlement since Nov. 27. The United States Natural Gas Fund, an exchange-traded fund that tracks movements in natural-gas prices, has rallied 9.7% month to date.
The rally followed a U.S. Energy Information Administration report showing a bigger-than-expected 145 billion-cubic-foot drop in weekly natural-gas supplies, which took total supplies below 2 trillion cubic feet for the first time since mid-May 2011. Inventories are down 440 billion cubic feet from the year-ago level.
“Weather, of course, is a big factor and impacts prices weekly,” said Greg Renwick, president and CEO of East West Petroleum Corp.
Over the long term, however, natural gas is expected to be used in other industries, such as vehicle transportation, he said. Economic growth and prices of competitive fuels will also be key factors on the demand side for natural gas, he said, while production levels and volume in storage are key on the supply end.
NG is starting to catch my attention beyond the reasons you cite- like, carl icahn has upped his stake in chesapeake. companies scarfing up gas assets (like VNR) on the cheap from distressed companies may be setting themselves up as long term winners. Culling the weak will make the strong stronger if NG stages the kind of comeback predicted by those envisioning longer term LNG export, increased use in transport by trucking/rail, etc. I believe VNR CEO also mentioned they are looking at a spin off of c-corp arm similar to LNCO. I am doing DD on VNR as that is a name i am not in but seriously looking at, especially if they do a SO or launch a c-corp- if LNCO is any example, it could offer a very attractive entry point for a long term NG play
anybody have some favorite NG names or opinion of VNR?
The CEO also said they would have to change their strategy if the were to conduct a "VanCo" type offering. Not out of the realm of possibility, I suppose, but also something that they would have to develop vs. being able to create it over night. (He mentioned they do not do as much drilling so therefore do not have as much tax shield as LInn.)
And in the U.S., analysts have seen overall improving economic conditions, bigger-than-usual production declines and total supply levels in storage at their lowest in nearly three years.
So far, demand growth has at least been able to keep up with growing production in the U.S.
“The market balance for gas demand and supply is beginning to come closer inline,” said Chris McGill, vice president of policy analysis for the American Gas Association. “Clearly, a rational response to the supply-long position we have experienced for the past three years.”
Annual consumption climbed 11% from 2009 to 25.5 trillion cubic feet in 2012, while total annual well production, including those from shale gas wells, climbed about 14% from 2009 to 29.8 trillion cubic feet last year, according EIA data.
Production will be the big thing to monitor in 2013, said James Williams, energy economist at WTRG Economics.
“Production should finally start to reflect the low level of natural-gas drilling activity,” he said, noting that there are 40% fewer rigs drilling for natural gas than last year.
But technological advancements have managed to help offset the impact of the lower rig count.