No commodity has fallen quite as precipitously as natural gas — with the possible exception of crude oil — since the bull commodity market imploded in July 2007. And crude oil has at least come off the canvas.
Natural gas futures broke below $4 in February, the first time it has breached that level since November 2002. Despite the huge drop, Energy Management Institute founder Dominick Chirichella says there is more room to the downside. Chirichella targets $3.75 for the May contract, but adds that it could go as low as $3.50. “We are going to approach a bottom, primarily because supply is being constrained,” Chirichella says.
He says that the big increases in production in 2007-08 included shale gas and other sources that are a lot more expensive to extract than the current price can support, so a lot of production will be shut in.
But because there’s no relief in sight from the demand side and with winter over and the summer cooling season months away, his overall outlook is bearish. Chirichella says that it will be a while before industrial consumption picks up due to the recession. “Until the economy turns around, that sector of demand will not come back.” Chirichella doesn’t expect any relief from the economy until late 2009 and says any near-term rebound will depend on how much production is shut in and summer cooling demand.
