Gas steps up in class
Natural gas has been risng steadily since its 2012 low below $2 thanks to the revolution in hydraulic fracking and some ill-advised “use ’em or lose ’em” production sharing arrangements that kept gas flowing despite historically low prices. It has had a nice run because of an unusually cold fall and early winter. “I am not as bearish as I was two months ago because of the cold weather,” says Chen, who expects it to move back to the $4 level.
In addition to stronger production, gas has languished because of several years of cooler summers and milder winters. Flynn says that the early start to winter and the January cold snap are putting upward pressure on natural gas. “According to forecasts, we are going to be much colder than normal this winter,” he says.
“We are about 25% above where we were last year, and production continues to rise,” Chirichella says.
Despite all this, there is an unusual calm in the gas market. Nearly all our analysts acknowledged that the type of cold snap that occurred throughout the United States in the early part of January would have created a more dramatic move in the past.
“The kind of volatility we used to have, those days are gone,” Chirichella says. “I don’t expect to see $3, $4, $5 rises in natural gas because of cold weather. The fact is, supply is still robust; as long as supply remains robust the upside will be a calculated move not a wild and crazy move.”
Perhaps a similar paradigm shift is in the offing for crude.
“The [United States] is going to be the epicenter for energy once again,” Flynn says. “We are going to be a major importer, a major exporter and a major producer. Overall the trend for both markets will be down. The better supplied the market is, the easier it is to get the product to where it needs to be. Ultimately, that is going to lead to lower prices for everybody and that is going to be good for the global economy.”