Natural gas producers warn of costly future

updated 3:15 p.m. ET May 18, 2006

WASHINGTON - With the price of natural gas at its lowest level in more than a year, the industry that supplies this mostly domestic fuel has a message to consumers: don’t get used to it.

Following a warm winter that sapped home-heating demand, U.S. natural-gas inventories have bulged to record springtime levels, and that has caused prices to plummet roughly 60 percent since their mid-December high. Many analysts anticipate a further swelling of inventories in the months ahead and say prices are susceptible to another 20 percent decline.

To the extent local utilities can buy and store cheaper fuel, “those are savings that go to the consumers,” said Chris McGill of the American Gas Association, whose members deliver natural gas to some 56 million U.S. homes.

But the Natural Gas Supply Association, which represents companies that produce the fuel, warns there is no guarantee that the nation’s supply cushion will look so comfortable by the end of summer — let alone next winter, when consumption typically peaks.

If it is an unusually hot summer, association president Skip Horvath argues, homeowners will crank up their air conditioners, which suck up lots of gas-fired electricity. If there is a repeat of last summer’s ferocious Gulf of Mexico hurricane season, significant volumes of offshore natural-gas production could be lost. And a colder-than-normal autumn could rapidly deplete inventories before winter.

Traders on the New York Mercantile Exchange seem equally nervous about these possibilities.

The price of natural gas to be purchased in February is almost $11 per 1,000 cubic feet — or more than 80 percent above the price of fuel deliverable in June.

If the market was as worried about the future supply-demand balance for oil, February crude futures would be trading at around $125 a barrel right now instead of $73. (With June oil futures trading in the upper-end of their 52-week range, the implication is that oil traders are more jittery about the near-term.)

The main reason for the plunge in front-month natural gas futures since December has been weekly Energy Department data showing steady increases in the volume of gas stored in underground facilities across the lower 48 states. On Thursday, the agency’s latest report showed inventories rising to more than 2 trillion cubic feet, or 53 percent above the five-year average for this time of year. That sent Nymex natural gas futures sliding 18.9 cents to $5.94 per 1,000 cubic feet. The last time natural gas futures settled below $6 was Feb. 18, 2005.

Judging by the rate at which natural-gas is currently being injected into storage, analysts say there could be more than 3.5 trillion cubic feet of inventory before the start of the next home-heating season, or 6 percent more than last year’s record.

It is possible, said Dan Lippe, a Houston-based energy consultant at Petral Worldwide, that by fall the country’s storage capacity may not be sufficient to hold all the available supply, forcing some producers to cap wells.

“You’ll have gas producers chasing customers around,” Lippe said. “That would be very bearish for gas prices.”

Mounting concerns about limited storage capacity later this year — and the potential for huge profits if the wide gap between June and January futures holds — could accelerate the pace of inventory stockpiling this summer, said Antoine Halff, director of global energy at Fimat USA.

Ron Denhardt, vice president at Strategic Energy and Economic Research Inc. in Winchester, Mass., said natural gas prices could fall to $5 if it is a mild summer and no significant output is lost due to hurricanes.

While consumers thinking about locking in a fixed cost for natural gas may see some slightly better offers than were available earlier this year, most of the terms set prices above $10 per 1,000 cubic feet, and in some cases above $14 per 1,000 cubic feet.

Horvath said natural-gas inventories may be high right now by historical standards, but the fact is that demand naturally tapers off in spring.

“You don’t want to look at a couple of weeks in the shoulder period and read too much into it,” Horvath said.

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