oiler1930

The Volatility of Natural Gas

I purchase natural gas under forward contracts based on futures prices at the time of purchase. When there occur reasonable dips, I try to enter a portion of needs for contract, and currently am buying out to 2010 needs. In essence, this is a hedging program. The big spike to $15 was aggravated by Amaranth's action, but was impelled by the damages due to Hurricanes Katrina and Rita. It took a while for prices to recede.

My daily analysis is directed to the ratio of the prices of crude, heating oil, and gasoline to the price of natural gas for the three nearby contracts, but corrected to price the cost of the relative heat content of these fuels, the upshot is that natural gas is priced in a range of 47% to 53% of the fuels, prices. This ratio was reversed to about 129% during the panic. Looking only at the record highs, the liquids are about 120% of NG.

Natural gas heat is relatively cheaper because production costs are much lower, and so are gathering and transportation costs. Coal bed methane is now being produced, and is profitable despite somewhat higher extraction costs, including coproduced water.

NG is definitely a cleaner fuel, in part because it is mostly burned at atmospheric pressure. Internal combustion engines, reciprocating or turbine, operate at high enough temperatures that nitrogen oxides invariably are produced as co-products of the combustion. The NOx concentration is not high enough to cause direct toxic symptoms, but is a needed component for the production of ozone during daylight hours. Should our transportation fleets move to the use of NG as a fuel, air pollution will continue to be about what is now.

As an aside, T Boone Pickens hs been touting NG prices in parity with liquid fuels. This would imply a doubling of the price. Such an occurrence would impel a counterattack of increased NG production and distribution, so that demand would be brought to parity with supply, and prices revert to current levels.