Energy outlook: Economy rules

September 30, 2010 07:00 PM

Natural gas glut

The supply story is once again the driving factor for natural gas prices. Supplies are at record highs and analysts expect them to stay that way. “Natural gas just keeps on flowing. The one constant that exists in the natural gas market is that supply is continuing to run at high levels,” Chirichella says, adding that if the economy does continue to slow, it’s going to have a negative impact on the consumption of natural gas, increasing supply even further. Unless there is a hurricane, he expects natural gas to trade in the upper $3 to mid $4 range for the rest of the year.

Patton agrees. “The supply and demand picture looks really bad, so the only thing that could save natural gas is a hurricane. Lower prices are coming soon. The only other thing that could help is if there’s a policy announcement from the White House saying natural gas is going to be more important to alternative energy (see Cover story). Prices look like they’re headed lower, and quickly.” He expects natural gas to stay in a range between $3.75 and $5 around the end of 2010.

Ilczyszyn says a stronger dollar short-term will drive down natural gas prices. He expects natural gas to be at $5-$6 at year end.

Flynn expects the hurricane season to end with a glut of natural gas supply and an uncertain economic outlook. “Manufacturing and natural gas prices sometimes go hand in hand, especially when we talk about industrial demand, and if we lower our expectations in the manufacturing sector, we could lower our prices. I’m looking for a spike below $3,” he says.

Hurricanes or geopolitical events, as always, remain the wild cards for energy prices. “Oil and natural gas were supported throughout the summer on predictions of a record hurricane season. A lot of the hurricane season has passed us by and we’ve already seen the hurricane premium being taken out of the market,” Flynn says.

Energy fundamentals, however, are a funny thing as Flynn pointed out above. While the global recession is keeping demand down, the Fed’s remedy of quantitative easing may be keeping crude prices up. While a sustained recovery may bring back demand, it also will bring the much anticipated exit strategy that would take out that support, making the energy outlook that much more difficult.

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