From the October 01, 2009 issue of Futures Magazine • Subscribe!

Energy outlook: Crude correlations and what comes next


The supply story has become THE story in natural gas as inventories approach record levels.

Chirichella says that natural gas production has not been cut enough to get ahead of the declining demand curve, and by mid-November, natural gas inventories will exceed available storage space in the United States. “Unless something major changes, we’ll be at the highest level of natural gas inventories as we approach this winter season, and that’s bearish. Natural gas prices right now are trading at levels that we haven’t seen since 2002. The next stopping point if nothing changes could be as low as $2.60-$2.80 per mmBtu,” he says. He adds much of the increased supply is due to decreased industrial demand, which could pick up as the economy recovers. “The piece that’s absent in the natural gas market is the industrial consumer. That sector will come back, but slowly.”

Brian Milne, refined fuels editor for Telvent DTN, says crude oil usually trades up to six times higher than natural gas, but right now crude oil is trading at a ratio of 25:1 over natural gas (see “Widening chasm”). “Natural gas could go down to $2 if crude oil holds up. We saw a lot of reduction in industrial demand as a result of the recession,” he adds.

Brad Smith, price risk manager for U.S. Energy Services, says that medium- and long-term, traders should watch economic recovery and supply situations in the natural gas market. He expects natural gas prices to fall through the end of the year. “Manufacturing activity has picked up in the third and fourth quarter, but there are going to be a lot of drags based on the labor market and consumer spending that are going to hamper growth going into 2010. That accompanied with a very large supply will drag prices down,” he says.

Hartmann expects natural gas to get to the $2 range by the end of the year. Chatterton predicts a year-end natural gas price of $3.50-$4.

Rafield expects natural gas to be at $3 by the end of the year, barring any supply disruptions in the Gulf of Mexico. She says there’s also an inventory overhang in heating oil. “If anything, you could see fuel switching out of heating oil and into natural gas and that could put a floor under natural gas prices. We need to see a pickup in industrial demand to see both natural gas stock and stocks of middle distillates (diesel, heating oil) start to erode.”

Chatterton expects heating oil to hit $1.60-$1.75 per gallon by the end of the year and RBOB/Gasoline to reach $1.75 to $1.85 per gallon.

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