Almost every day, I wander over to the IV CWEI board to read what Robry has to say and occasionally I do a llttle bit of additional reading if some interesting sounding post. I particularly enjoy reading K1Farrell's posts both because he is smart and because, as a University Professor, he actually urges people to do something that they don't necessarily like to do--to think. At any rate, today I saw a post from a very helpful person who identifies himself as Cougar. Cougar I believe is the very same person that Z maligned some time ago here so, as a way to think about natural gas and as a way to pay a certain homage to Cougar I'll post a criticism of his line of reasoning.
Incidentally, criticism has often come to be thought of as something which is negative. I definitely do not regard it that way. I am very old school and agree with Henry James idea about criticism expressed in his literary thinking--"to criticize is to appreciate, to appropriate, to make a thing one's own". A very important thought--criticism leading to a sense of greater community.
In any event, Cougar's idea, as best I remember it is pretty simple.
THIS POST IS INTERRUPTED BY MY REALIZATION THAT DINNER NEEDS TO BE MADE. FELLOW POSTERS SHOULD EXPECT A COMPLETE POST BY LATE THIS EVENING.
Cougar's thesis is reasonably simple. He has analyzed the rate of natural gas draws, made some assumptions about how normal summer weather will be and has come to the conclusion that, absent a hurricane supply disruption, injection season end storage will be 3.09 Tcf or about .45 Tcf less than last year's end storage. If you think about it for a minute, that's not a terribly surprising conclusion given the fact that we're approximately .4 Tcf behind last year's storage levels at this very moment.
All of that having been said, I think that Cougar's conclusion is the least likely outcome of all possible ones even though it cannot be absolutely ruled out. I say that for a very simple reason. Taking the last three years as examples, we've had varying conditions including a major supply disruption associated with Katrina and Rita in 2006, and we've always stored at least 3.35 Tcf. The reason for this is simple: the market refuses to end the season significantly below full storage which has grown to a current 3.55 Tcf or so because the market recognizes that it must have that amount to safely supply the various end users over winter.
So, what do we do with Cougar's idea that storage could end as low as he suggests? We've only got about 4 more weeks during this shoulder season when we have the ability to store very large (nearly 100 Bcf/week) amounts of natural gas and it now appears as if the next several of those weeks will come in significantly below the injections that we would normally expect. This means that when any real heat hits and drives up electricity generation and natural gas demand in July that we'll be even further behind where we need to be to fill storage.
We know from experience what the market does when faced with such problems, which is the reason that Cougar is likely not to be correct in his conclusion, and that market solution is price. Natural gas priced at $13, roughly 10:1 to oil, is not priced sufficiently high at this point to choke off enough demand to fill storage appropriately. How high does natural gas have to go? My suspicion is that it will go to the 2006 high of $16 and also that it will go higher than that to the extent that the market attempts to solve the storage shortage later in the season rather than earlier in the season.
I'd also add that the single largest potential savior of the marketplace--the potential for significantly increased LNG imports--is still off the table as cargoes are being purchased by foreign buyers for $15 to $18 per regassified Mcf. Imported LNG is the logical way to solve the current problem and my conclusion would be that we will at some point this summer begin to price product in such a way that we can compete for those cargoes. If you accept this idea, then, you can't lose owning any of the gassers this summer. Park's HK or CHK or KWK or XTO or CHK or ECA, for that matter, all continue to seem like very logical investment ideas.
Peter, believe your assessment is good but what if we get a down draft in oil prices? How long would it take for gas to respond to that move? If oil falls to $70 this year, would gas track it to $7 ? And the down side of all these new unconventional gas plays is that a lot more gas will be coming on the market. And we have the LNG capacity to flood the market. My gut is telling me that this is a sweet spot for nat gas, just not sure how long it will last. Hare