quote:
Yet another counter-trend for the books. US natural gas prices are continuing to sell-off from their July peaks, a pattern that is exactly the opposite of what you would ordinarily expect in the market.

According to Merrill Lynch, the situation is the result of higher-than-expected storage builds in the summer due to a surge in domestic gas output:

Previous tightness evaporated quickly and prices fell as the market experienced oversupply. Not even two major hurricanes, with their corresponding gas output reductions, have been enough to tighten the market.

The bank warns prices could fall further still. A lack of global LNG meanwhile will likey keep the US market dislocated from other global gas hubs - where are prices are much firmer - for the near future.

LINK

I sure hope you guys' winter talking points take hold soon.

This post was edited on 11/3/08 at 10:32 am

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Posted by barry

Location, Location, Location

Member since Aug 2006

51357 posts

Posted on 11/3/08 at 11:26 am to Tiger JJ

My friend lost his job at a hedge fund last year before he ever started because they had shorted natural gas futures and prices just kept rising after winter and they lost about 500 million bucks in a week.

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Posted by ElmGrove

Member since Jul 2008

55 posts

Posted on 11/3/08 at 11:44 am to barry

Here's my uninformed spin on NG futures.

Like many commodities, it's investor driven, i.e., not driven by physical demand (usage).

Therein, the wild ups and down are due to "programmed trading."

Therein, those who know the software code on the programming, know the market.

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Posted by Tigris

Cloud Cuckoo Land

Member since Jul 2005

13081 posts

Posted on 11/3/08 at 5:51 pm to Tiger JJ

Interesting link, thanks. Good lord, the "expert" who predicted natural gas pricing at our industry conference in April could not have been more wrong. He expected a gradual increase to $14-$16/MBtu by late 2008 based on the world price for LNG. His position was that we have declining production, increased demand (especially electricity generation which is 100% natural gas in new plants as of now) and so imported LNG would have to fill the gap.

Well, from a US government site for the short term energy outlook (as of Oct. 7):

LINK

"Consumption. Total natural gas consumption is expected to increase by 2.4 percent in 2008 and by 1.9 percent in 2009...

Production and Imports. Total U.S. marketed natural gas production is expected to increase by 6.7 percent in 2008 and by 4.2 percent in 2009..."

So yeah, I can see why prices have fallen so hard and may continue down. Natural gas is very inelastic. On the other hand inventories are only 2% above the 5 year average and are 4.5% below last year's levels so the inventory isn't all that great, probably more a case of more proven well capacity. It would take very cold weather to spike the prices this winter though. That is possible given the lack of sunspot activity though apparently NOAA disagrees.

Long term (a few years) I think we will see natural gas prices back up over $10 and probably closer to $15. At current prices exploration has to be slowing and those new electricity plants are being built.

The graph showing that natural gas in the US is relatively cheap when compared to most of the rest of the world (aside from the middle east where it is dirt cheap) makes me think that fertilizer stocks could be a good play. Natural gas is 80+% of the cost of fertilizer production. Fertilizer stocks have taken a beating because the prices of corn and wheat have fallen by more than 50%. Another caveat is that fertilizer being sold now was made with expensive natural gas and so is marked up. Farmers may say "screw buying fertilizer this year, I don't have any money and the price will be cheaper next year". On the other hand there is now little incentive to import fertilizer to the US which is completely the opposite of a year ago and the production cost is down by 50%. A company that I consult for is optimistic and proceeding with some expensive projects in their facilities. A couple of companies to consider are CF and TRA. CF bought back $500M of their stock last week. I am not saying buy these, just that they deserve some thought, especially if natural gas in the US stays cheap relative to the rest of the developed world.

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