Unnatural Gas

If you're not perusing the Standard & Poor's Commodity Perspective, you should be. I cracked the June edition open and a few statistics jumped out at me.

First off, the S&P GSCI Natural Gas Index has lost 86% since it first started in the beginning of 1994 - at the same time that spot prices for natural gas have gone up 500%. For a casual finance reporter at the local newspaper, this might be a head-scratcher. But to the veteran futures watcher, it's the all-too-familiar grasp of volatility and contango. Here's how it looks today:

Natural Gas Futures Aug '08 13.430 Sept '08 13.498 Oct '08 13.619 Nov '08 13.939 Dec '08 14.323 Jan '09 14.516

Even though natural gas prices are going up (and up and up), the index is nibbled away each month it rolls forward.

But it seems as though the natural gas index is turning around. S&P's Commodity Perspective reports that its Natural Gas Index was up 13.54% in June, and up a total of 74.5% for the first half of 2008. Nicely done, Henry Hub.

So why isn't natural gas making the same type of headlines that oil is? For one thing, while people use natural gas every day, they don't think about it much. It's one thing to reach into your wallet to pay to fill up your car a couple of times a week. It's another to get your gas bill (if you heat your home wi mean, i ith natural gas) or electricity bill (your electric company may be using natural gas to provide you with electricity) and pay it monthly. Yes, price increases are felt, and yes, we complain to one another. But rising natural gas prices aren't foremost in people's minds.

But prices have been rising.

NG, NYMEX Weekly

In fact, they seem to be rising a little out of character. Natural gas is notoriously seasonal. Winter is the time we usually see large spikes in natural gas prices as people turn to natural gas to heat their homes. Summer can see some small increase in price, especially hot summers when electric companies turn to natural gas to help provide their customers with electricity to power their air conditioners. But this increase seems a bit unusual, looking at the long view.

NG, NYMEX Monthly

When you look back over the last eight years, it is only in 2005 that we see a huge midyear price spike. That, of course, was not a normal summer. Sure, 2005 was hotter than usual, causing natural gas prices to start edging up as electricity producers increased their demand for the fuel. But then Hurricanes Katrina and Rita destroyed the coastlines, disrupting service and causing all sorts of problems that spiked natural gas prices (along with crude and gasoline prices.)

Oil Parity

How then to explain the latest climb? Let's turn to the Energy Information Administration, one of the more useful U.S. bureaucracies. The EIA provides a weekly status report for natural gas, just like they do for petroleum. Price, transportation and storage status are covered in glorious detail. In the report released July 3, they reported that gas in storage is 57 billion cubic feet (Bcf) below the five-year average, even after an increase of 85 Bcf in the past week.

Okay, so there's a minor blip on the supply side. Theoretically, this lower storage could create some uncertainty that we'll have enough natural gas come cold season. There is also the impact hot summer days have on natural gas. Hot summer days equal increased cooling-related demand from electric utilities, and thus less gas available to go into storage.

But really, I'm thinking crude oil prices have been having more of an impact this year.

Chart from the Natural Gas Weekly Update released July 3, 2008

To compare the two energy fuels, analysts convert everything to a common denominator: Price per million Btu (MMBtu). Last week, natural gas was priced at $13.389 per MMBtu, and crude equated to $24.78 per MMBtu. This conversion allows us to compare apples to apples. As shown in the graph above, crude is more expensive, but the gap between the two fuels has remained fairly stable since the beginning of the year.

Chart from OE Energy Market Snapshot, National Version - May 2008 Data

But should it be, if rising crude oil seems to be pulling up the price of natural gas? In early 2007, natural gas and crude were fairly close in price per MMBtu, and even traded against each other last summer for a while. Then the price of crude began to rise in earnest. And NG followed. Are they trading in tandem because everyone thinks they should?

Supply And Demand

Will prices continue to rise? If I had a crystal ball, I'd be rich. Without it, my guess is just that - a guess. What I can point you to is the fact that production of natural gas rose 3% between early 2006 and early 2007. That growth was even larger between early 2007 and early 2008, with production increasing 9%. These numbers don't seem exceptionally big until you take into account that natural gas production hadn't grown in the nine years preceding 2006.

The supply increases aren't completely wacky: Just like oil, higher natural gas prices encourage increases in production, so if the current trend continues more natural gas should be produced. But just like oil, increases in production lag behind price increases, because most of the time you can't just turn on the tap and get more natural gas. Like crude, it takes time to find, develop and then transport natural gas - a time line that can be anywhere from a few months to 10 years long.

From a very local perspective, oil and natural gas are in fairly divergent markets. Oil available to the U.S. is actually down, with most exporting countries actually shipping out less of the stuff. Natural gas, which we produce much more of locally, has increased production more than 10%. And according to the EIA, demand shouldn't increase anything like the increase that's expected in liquid petroleum products.

Charts from EIA Energy Outlook 2008

What's at work here is obviously a much more complicated model than just simple long-term supply and demand. The EIA charts assume a decent amount of importing in natural gas, which has been slow to show up. International demand has remained difficult to predict.

Short term, the world's energy markets are out of control, and predicting them would be a mug's game. But long term, I never like to bet against supply and demand, and natural gas and oil live in unique worlds.

Comments

[bluesmoke]

Natural gas is so simple - once found and accessed, it's fairly easy to transport (pipes or liquid), it's plentiful, it could easily complement more & more of our energy needs, and it's right in our backyard (ground deposits) as well as it can be generated from our landfills (methane). The only thing stopping it is the lack of any energy policy!

[rlminehan]

It is unconsciable that our people in D.C. have not the slightest
idea of the importance of our domestic NG resource in taking the
price pressure of crude oil. This is especially true after promoting
the inane legislation re corn ethanol. Boone Pickens to the rescue
please!!!

[dubious]

We most certainly do have a National Energy Policy and the people in DC know exactly what they are doing. It is the policy of the United States government to keep energy prices high. It is US policy not to explore, not to drill, not to exploit, not to refine, not to use nuclear and not even try to be energy independent. That's our policy. It's been that way regardless of the party in charge. It's one way politicians keep the masses under control.

[john s.gordon]

don't forget bituminous coalbed methane. seams have to be drained before mining can be performed safely.
? jack

[paulk8756]

Greg,

I understand your interesting post. Most of it, anyway.

Yes, it is certainly the energy policy of Congressional Democrats to maintain high energy prices, as this leads naturally to the increased use of alternative fuels over time. But I don't see how you can lump both political parties together on this issue, especially recently.

And I must say you lost me when you said, "This is one way politicans keep the masses under control." Please explain yourself.

[paulk8756]

Greg,

(No offense intended, friend. I'm simply interested in your perspective.)

[dubious]

PaulK
Politicians have been talking, but not producing results, for decades. The Dems alternative fuels solution is nothing new. I remember the first energy crisis in the early 70's when gas went from $.27 to $2.00/gal and we all thought certainly the world would end. That was the first time they changed the national speed limit to 55mph -- for awhile. I also remember all the promises for alternatives and solutions, the same we hear today; alternative fuels, electric cars, solar homes, passive solar, etc, etc. Forty years later we are not much closer to getting off oil. And for forty years, with whatever combination of Dem Pres/ Dem congress, Rep Pres/Dem congress, Rep P/Rep C, etc etc the govt. has never really pressed hard to work solutions. Sadly, they all have excuses for "not" doing something; 'we can't drill our way out' , 'we can't drill, it will be 10 years', 'they're not using the leases they have now', 'what about the baby polar bears and the beaches'. Seems T.B. Pickens is the only real man in the country. He's actually doing something, with his money. The politicians just wring the hands and do the Graham whine.
Generally, societies fully exploit their own resources first before turning to other nations for trade, (or war). Our govt. has put up every roadblock imaginable to prevent drilling, coal use, or nuclear. It is our govts. policy to remain dependent on foreign oil. The govt wants you on mass transit, limited travel, smaller homes, no bbq grills, all driving the same small car or scooter. This saves the vital resources for the elites, but I'm not suggesting conspiracies.
In the short term, the Dems will do nothing because it works to their advantage in Nov elections for Americans to suffer.