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Warm Winter Blasts Natural Gas Prices
June 2006
An abnormally warm winter has blasted natural gas prices down from their highs of last fall, and improved market conditions this spring, which bodes well for stable prices in 2006. While there are, of course, no guarantees, most analysts believe that without an unusually hot summer or a repeat of last year’s hurricane season, this year should provide respite from the rollercoaster ride we’ve been on recently.
Looking back for a moment, it’s hard to remember all the shocks we went through last year. We entered the spring of 2005 with reasonable expectations of stable, but higher than normal, natural gas prices. We had survived the “storm of the century” in the Gulf of Mexico, 2004’s Hurricane Ivan, and supply was returning to normal after infrastructure repair. Early in the 2005 hurricane season, Dennis hit and caused some disruption, yet we were again returning to normal when, in late August and September, we were struck with the double whammy of Katrina and Rita. These storms moved through the heart of the Gulf Coast energy complex in Louisiana and Texas, damaged or destroyed more platforms, pipelines and processing plants than anyone could have imagined possible, and forced workers to move hundreds of miles away from their jobs, thus slowing recovery once the storms passed. As we entered the winter, therefore, the nation was fearful of supply shortages, high heating fuel prices, potential electricity problems particularly in New England, and grandma freezing in the dark. A colder than normal December only added icing on the proverbial cake. Gas futures increased back up near the panic levels seen with the earlier hurricanes. Things were looking bleak as we headed toward Christmas when, so it seemed, Santa Claus brought relief.
Starting sometime around Christmas, warmer than normal weather hit the United States and warm weather has stayed in place since. Warmer weather throughout the country for the 2005/2006 heating season softened cash prices, lowered near term futures prices, and have helped sustain a larger that normal natural gas storage inventory as we begin the 2006 injection season. Gas prices have dropped from their highs in excess of $15/MMBtu and are now in the $7.00 range. Working gas in storage was 1904 Bcf as of April 28, 2006. Based on this data the inventory was 699 Bcf above the 5-year average of 1205 Bcf. Although we recently saw a bounce in demand and price related to consumption for electric generation, that increase should not affect storage inventories a great deal. With these factors in place daily cash prices should stay reasonably soft through much of spring prior to the onset of sustained heat across the country.
As hurricane season approaches many think the NYMEX prices should reflect fears of another record hurricane season. For this reason alone many customers are asking to secure supply and lock prices for a portion of, if not their entire, projected demand for the upcoming year. The price of gas is 50% of what it was less than one ago. Although no one knows where the bottom of this market is for both near and long term supply, it may be a good time to take at least some of your risk off the table.
Compass Energy Gas Services, LLC is a leading provider of gas supply and management services for customers in Virginia, North Carolina, West Virginia, Ohio, and Pennsylvania.
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