From the February 01, 2010 issue of Futures Magazine • Subscribe!

Energy outlook 2010: Slow and steady

NATURAL GAS OUTLOOK

Like heating oil, natural gas started 2010 spiking as the United States was battered by arctic-like temperatures and snow storms. Neither heating oil nor natural gas were in short supply, suggesting the price spikes were a knee-jerk reaction to weather rather than an objective analysis of fundamentals.

U.S. working gas in storage at 3.123 trillion cubic feet was 10.1% above year-ago levels and 1.3% above the five-year average the week ending Jan. 1, 2010, according to data from EIA. U.S. working gas in storage was at the upper end of its five-year average at the start of 2010. Given the amount of working gas in storage, prices for the front-month natural gas futures contract on Nymex are more likely to drift back towards $5 per mmBtu rather than spiking back above $6, especially with forecasts calling for a moderation in temperatures. As demand for winter fuels wanes, the natural gas market will be at the mercy of hurricane season. The 2009 hurricane season was the mildest since 1997, according to the National Oceanic Atmospheric Administration, whose 2010 forecast will not be released until May.

WILD CARDS

Weather is always a wild card for both natural gas and oil markets. But oil markets are global and several wild cards could play out in 2010.

• The ongoing face-off between western nations and Iran over the Islamic Republic’s plutonium enrichment program could push geopolitics back to the forefront of oil market concerns.

• Russia’s potential erosion of OPEC’s oil market share could set the two entities up for a quiet supply dispute.

• A more robust recovery by mature economies and the resultant pick-up in demand could cause oil prices to spike higher, although the current level of spare global production capacity makes that the least likely scenario.

An ongoing sluggish recovery could keep central banks, the U.S. in particular, from raising rates, leaving the dollar vulnerable to another bear attack, while pushing all commodity prices higher.

All these factors need to be considered because whether it is geopolitics, weather or Federal Reserve machinations — as we have learned over the last two years — any of these wild cards can trump traditional fundamentals when it comes to energy prices.

Linda Rafield is a senior oil analyst at Platts and editor of the weekly publication “The Futures and Derivatives Review.” For more information on the weekly publication go to www.platts.com.

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