Plenty of gas in storage and warmer temperatures on the way will make for happier days for natural gas consumers. Investors in the industry, however, might want to buckle their seatbelts and prepare for some unpleasantness as the market transitions through a light injection season on its way to another winter.
"Looking at a number of forecasters out there in the gas marketing community, the price of gas is expected to drop from about $6.60 currently to about $4.80 by August and then recover to about the $8 area by January," said John Olson, co-manager of equity hedge fund Houston Energy Partners. Given the historically high correlation between commodity prices and energy company share prices -- 90% for oil prices and about 61% for natural gas -- energy sector investors will be riding along on the commodity price roller coaster.
Olson, formerly a vice president with Sanders Morris Harris in Houston, has more than 30 years of experience covering all segments of the oil, gas and electric industries. He will be one of many speakers at GasMart 2006, May 3-5 in Denver.
Olson pointed out that in February, right after the warmest January in 112 years, the share prices of natural gas companies fell 8%; major oil company share prices fell 9.8%, and the share prices of oilfield services companies fell 12.5%. However, March saw at least a partial recovery.
"The market is poised to weather the coming challenge of a projected 25% decline in [commodity] prices," Olson told NGI. "How much the market discounts into the future remains to be seen. I'm telling you in the next five months gas prices might fall as much as 25%, according to some seasoned industry observers... and then recover smartly. The stock market is fickle. It probably is heading into a little heavier weather in April and May before it begins to look at the coming heating season and look at the coming [commodity] price recovery instead of the price decline."
While summer-winter price spreads are making for some profitable gas storage plays, the equities market doesn't follow this industry fundamental the way it used to, Olson said. That's because of the demise of the big marketing companies and the fact that so few of the ones operating today have a noticeable profile among industry investors. Olson cited Oneok and Sempra Energy as being particularly astute at the seasonal gas storage play and said he "would be pleasantly surprised" if seasonal arbitrage again captured the imagination of equity investors.
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