Tuesday, May 29, 2012

"Sizzling natural gas may be summer fizzle"

The front futures are down 4.3 cents at $2.525.
Two caveats to our dour outlook for natty:

1) The weather. The 90-day forecasts are for slightly above average temperatures but lower than last year.
If we should catch a couple heat waves injections into storage will be lower. The location of the heat is also imortant. If it is in Phoenix, meh. If it is over the NYMEX and the gas traders break a sweat they'll bid the stuff up.

2) Depletion rates. We're hearing from lessors that their royalty payments from wells drilled two years ago are reflecting declining production on the order of 50-70%. this is partly due to the nature of shale and partly due to what happens to the fracking compounds over time.
Because this stuff is so new no one has exact numbers on what total production and production rates will end up at.
More on this in a couple weeks.

A third possible concern is that at $2.749 we saw electric utilities delaying conversion from or actually converting back to coal.
We'll post on this tomorrow.

From MarketWatch:
Prices have risen 35% from their year lows, but some see top
A double-digit pop for natural-gas futures puts them among May’s best performing investments, but for the notoriously volatile and weather-dependant commodity, timing is always the trickiest part.
Natural gas slipped under $2 per million British thermal units in April, to its lowest in a decade. It has gained 35% from those levels, to over $2.50 per million BTUs. 

It will likely be “very tough to rally from here,” said Subash Chandra, a managing director at Jefferies in New York who follows the natural-gas market. 

Prices often rise and fall with weather expectations, as natural gas-fired power plants demand more of the product in the winter and summer. 

A warmer winter and plentiful production pushed prices from as high as $3.65 per million Btus in early December to the below $2, worst-since-2002 prices in April. Prices bottomed for the year at $1.91 per million Btus on April 19. 

Recent expectations of a warmer-than-normal summer in the U.S. and some concerns about supplies have pushed prices higher again, although year-to-date prices have plenty of catching up to do. 

Natural gas futures are off 14% so far in 2012, and off 43% from the year ago. For the month, however, prices have gained 12%, with June natural gas NGM12 -4.35%  closing Friday’s session at $2.57 per million Btus. 

United States Natural Gas Fund UNG -0.55% , an exchange-traded fund designed to track natural gas prices, has rebounded 11% this month but is still off 30% this year. 
The latest gains for natural gas were predicated on warmer days in spring signaling the warmer summer and as some power plants switched to natural gas from coal....MORE
See also:
Friday's "Natural Gas Rig Count FALLS by 6 to 594" and May 17ths "The Amazingly Fast Substitution of Natural Gas for Coal In Electricity Generation"