HardAssetsInvestor

Written by Julian Murdoch  |

July 07, 2008

Unnatural Gas

Details

Natural gas is on a tear, but should it be?

• The recent run
• Historical oil parity
• Complicated supply/demand model

 

 

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:

 

 

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.