Rise in natural gas prices seen as aberration

Lexington Herald-Leader
January 12, 2007

By Scott Sloan

HERALD-LEADER BUSINESS WRITER

The rise in natural gas prices in the last few days was most likely a "knee-jerk" reaction to cold weather expected later this month, an industry follower said yesterday.

Over recent days, the price of natural gas for delivery in February had traded as high as $6.80 per MMBtu (1 million BTU).

But as of yesterday afternoon, it was trading around $6.30, said Bill Foley, director of energy derivatives at Societe Generale. He spoke on a conference call organized by MXenergy, a natural gas provider from which Columbia Gas of Kentucky customers can purchase gas.

"It started to look like it was going to go through $7, and then last night it just started to lose steam ... ," Foley said yesterday. "I think everyone is starting to wake up to the fact that there's a ton of gas in inventory."

Working natural gas inventories are the highest they have been in the last six years, said Laurent Pommier, also of Societe Generale. Pommier speculated that a mild winter could result in a much higher inventory at the end of the winter heating season than in past years.

Even if it's a tough season, "we would still have pretty sizable inventory," Foley added.

Inventory levels have held because of strong U.S. production that was not interrupted by a severe hurricane season, as it was in 2005 by hurricanes Katrina and Rita.

Though short-term natural gas prices are low, the long-term price curve hasn't "really been getting hit too hard," Foley said.

But it is steadily dropping, he said, and as that happens, "we are seeing consumers come in, locking up the balance of 2007, 2008 and 2009 natural gas prices."

Foley said investment groups might switch from going long on gas to playing it short, which would indicate they think the price can fall further.

Pommier noted that the lower natural gas prices are starting to lead to thoughts that natural gas could compete more effectively with coal for electricity production.

"That's a serious issue if that happens," Foley said.

Utilities have begun using more natural gas in recent years because its price was generally low and it burns cleaner than coal, reducing environmental compliance costs.

Pommier said the price is not low enough at this point, but "you start being concerned about it when gas is in the $5 range."