DJ Commodities Corner: Natural-Gas Prices Vulnerable -- Barron's
(FROM BARRON'S 7/13/15)
By Timothy Puko
Bears in the natural-gas market can bide their time.
U.S. drillers are still producing as much gas as they ever have. Residential and commercial demand has actually
shrunk this year, and industrial demand is nearly flat. Historic demand from power plants has thwarted what many
thought could be a record fall in prices, but chances are that it has just postponed the inevitable until autumn.
Gas producers are on a collision course with the limits of what their buyers can store. Producers are far ahead of a
pace that would put a record amount of gas in storage before the winter heating season, prime time for demand. If
storage space runs out as autumn brings mild weather and low demand for gas-fired electricity and heat, there will be a
glut of gas with no buyers.
That could bring the price collapse some money managers have been lining up for.
So far, they have had a frustrating year. The shale-gas boom and a warm start to winter initially created substantial
stockpiles and kept the market oversupplied. Bank of America predicted that prices could fall below $2 per million
British thermal units for the first time in three years this spring, and the bears built up a near-record amount of
bets on lower prices.
Instead, demand for natural gas surged, sending prices in the three months ended in June to their largest quarterly
gain since 2013. Coal-fired power plants are being retired, and gas is picking up the slack, accounting for the largest
share of fuel in the power sector this spring for the first time ever, according to the U.S. Energy Information
Administration. That helped prices bounce up from $2.50 per million British thermal units and has kept them floating
around $2.80 since late April. They closed at $2.77/MMBtu, up $1.6%, on Friday.
Production has stabilized, and weekly storage additions are smaller than they were a year ago, leaving the market to
appear nearly in balance. Producers added 69 billion cubic feet of gas to storage in the last full week of June, the
lowest figure in more than two months.
But while these numbers might appear bullish for one week, they don't necessarily augur good times for a full season.
Even if producers add just that amount each week through October, storage levels would still be above their five-year
average heading into the winter. Most analysts expect larger storage additions in the weeks to come, and data provider
Bentek Energy predicts that new pipelines in the Northeast could add as much as four bcf a day of supply to the market
later this year.
All of this could send gas prices spiraling lower. If weather patterns "bring the cool summer people are calling for,
September and October prices could get really ugly in order to keep storage from getting too full," says Marc Kerrest,
who runs Cornice Trading in San Francisco.
Societe Generale expects a record 4.1 trillion cubic feet stockpiled by the end of October. That would effectively
fill all of the usable storage space in the U.S., or come very close to it, according to Bentek.
Waiting for that moment isn't for the faint of heart. Strong power demand is still likely to take gas to $3/MMBtu in
the interim, says Societe Generale analyst Breanne Dougherty. But when summer nears its end and storage nears its
limits, look for futures prices to retest the three-year low of $2.49/MMBtu.
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Timothy Puko covers the natural-gas market for The Wall Street Journal.
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(END) Dow Jones Newswires
July 11, 2015 00:05 ET (04:05 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
071115 04:05 -- GMT
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