HardAssetsInvestor

Written by Lara Crigger  |

September 24, 2010

Christopher Jylkka: Bearish Winter For Natural Gas

Details

The manager of Boston Energy Trading shares his current outlook on natural gas.

It's that time of year—Every fall we touch base with Christopher Jylkka, principal and manager of Boston Energy Trading, LLC to get his take on natural gas, as we head into the peak demand season of winter.

Having tracked the energy markets for more than 13 years, Jylkka is an expert on the day-to-day tactics and long-term strategies of natural gas players, and what he has to say about the winter of 2010 isn't particularly encouraging for natural gas longs: boatloads of supply, technological advances and an LNG infrastructure ready to pounce on price spikes.

This week, HAI Associate Editor Lara Crigger got the gory details from Jylkka.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): We've had a comparatively mild hurricane season. How do you see that impacting natural gas prices as we head into the winter?

Christopher Jylkka principal/manager, Boston Energy Trading, LLC (Jylkka): There's always a risk premium built into the front-month contract of NYMEX natural gas for a supply disruption, which typically peaks around the first week of September. I'm not sure how active the season was, but there were definitely some named storms, and maybe not close calls, but some that developed and tracked to the east of the supply area. So you did see that run-up in prices maybe going back a couple of weeks.

But we're well past the typical peak of storms. We could still get one, and that's an upside risk. But every day that goes by, the probability of storm-based supply disruption gets smaller and smaller.

Crigger: Are there other supply disruptions that could still occur?

Jylkka: Yes, but you have to look forward to the winter. About 20 percent of natural gas supply comes from shale production, which is on shore; some of that from east Texas or even in Pennsylvania, which is now producing quite a bit. You have a different dynamic there. You don't have the devastation that a Katrina would bring, or evacuations, but if you get a prolonged cold spell you can get wellhead freezes, which means a supply disruption from severe cold, possibly.

Crigger: I'm glad you brought up shale gas, because that really is becoming a bigger and bigger part of the U.S. natural gas industry. But there's a lot of uncertainty in terms of development, and whether it will overtake or just supplement traditional projects. How do you see this uncertainty?

Jylkka: In the media there has been a lot of focus on the fracking liquid that they use. And what they're getting hold of is the risk of some of this fracturing liquid leaking out in a place like the Marcellus shale [Pennsylvania], where it's sensitive to groundwater and habitat. The state made its own regulations, and there's also some involvement from the EPA, but still the bulk of the shale gas does come from east Texas. The Marcellus shale has been ramping up, but my focus is short term, so it doesn't factor into my analysis. I don't see it as a real risk in the short term.