As natural gas traders put 2007 firmly in their rearview mirrors, the focus now surrounds what exactly might be in store for prices in 2008. With traders widely agreeing that the days of $2-3/MMBtu are long gone, whether 2008 sees $5-6/MMBtu gas or $7-9/MMBtu gas will be largely influenced by the weather picture and whether increased liquefied natural gas (LNG) cargoes find their way to North America's shores.
Price volatility in natural gas futures quieted significantly in 2007 compared to 2006, which was largely due to traders in 2007 not having to deal with the aftereffects of major hurricanes, as traders had to do during the beginning of 2006. During 2006 the prompt-month contract traded in a $6.930 range between $4.070 and $11. In 2007 the range was much smaller as the prompt-month contract traded in a $3.430 zone between $5.230 and $8.660. Whether the trading range continues to get smaller in 2008 is anybody's guess, but one market expert noted that the direction of the commodity price will be decided by "whether we get weather" in the new year.
"Price direction predictions, volatility concerns and anything else surrounding natural gas will be answered by weather," said Ed Kennedy with Commercial Brokerage Corp. in Miami. "In the natural gas market, weather has always been king, so the big question for 2008 is whether there will be weather. Supply seems fine, there is plenty of gas in storage, but weather can change the equation. If we see a below-normal January, I think a number of these funds are going to be caught short."
Kennedy noted that traders look to weather year-round for price cues. Summer heat, hurricane activity and winter cold all get factored into the equation of price, he noted. "Tell me what the weather is going to be like. Tell me where the hurricanes are going to go come hurricane season," the broker said. "If we see another hurricane season like the one we have seen the last two seasons -- which featured above-normal storm activity, but nothing hitting the United States -- you are going to see these type of prices from the high $6s to the low $8s all year."
Another hot-button topic is whether and when LNG will become prevalent enough in the United States to make an impact on supply/demand economics -- and therefore price as well. A recent report released by Ziff Energy noted that while North American natural gas demand is projected to increase from 66 Bcf/d in 2006 to 81 Bcf/d in 2015, an abundance of lower-cost LNG will flood the market, driving down prices (see Daily GPI, Jan. 8).
Kennedy said he continues to be wary of the impact on futures prices from LNG. The broker said price, siting and takeaway infrastructure concerns make LNG shipments unpredictable at best. "Don't bet on LNG shipments when you are trading futures," he said. "Don't forget, the New England states are fighting against the LNG terminal that is sited for New Brunswick in Canada. That is not even our country and the United States is still grumbling about it. Now there are a few new terminals that have recently gone into service, but has the United States increased takeaway pipe capacity? The answer is no."
If the siting concerns don't limit LNG shipments to U.S. soil, global gas demand will, Kennedy added. "The key thing about LNG is it is an arbitrage market. Asia is set up to utilize LNG better than we are...and they are willing to pay for it. If the supplier gets a better price once those LNG tankers are floating across the ocean, guess where the ships are going to go? There is not a high reliability on LNG shipments."
With concern about LNG finding its way into the U.S. market, Kennedy said he doesn't think natural gas futures will see any impact. "I think the idea that LNG will influence price direction in the futures market is exaggerated," he said.
Others say LNG will definitely continue to influence natural gas futures as gas becomes more of a global commodity. "I think the biggest thing out there that we are going to talk about more and more in 2008 is this difference in BTU parity between crude oil and natural gas," said a Washington, DC-based broker. "The funds have huge longs in crude and huge shorts in natural gas. I think 2008 is going to be the year that they meet and revert, if not come around. The reason is the speed at which natural gas is becoming a globalized commodity. From what I have read and heard, the globalization of natural gas and the building of the necessary infrastructure is happening ahead of pace. All of the natural gas guys will soon have to be able to locate Qatar and Bahrain on a map. As natural gas becomes more international and more global, it is going to tie back into crude much more."
The current BTU comparison between the two fuels shows just how out of sync they actually are. February crude oil finished 2007 at $95.98/bbl, or roughly an equivalent of $15.997/MMBtu -- a $8.514/MMBtu premium to February natural gas, which finished the year at $7.483/MMBtu.
Focusing on North America, the broker said "exciting times" in pipeline infrastructure additions could impact the price of natural gas on the whole. "The REX [Rockies Express] pipeline could change prices in a number of regions," he said. "Specifically, the small premium that Appalachian gas has been able to command, that might disappear as Rockies gas is able to be brought into the Mid-Atlantic and Ohio Valley markets."
Another broker said that in addition to LNG issues, storage will likely dominate the headlines in 2008 for natural gas traders. "What really is going to be important to natural gas futures in 2008 is going to be how the storage situation plays out," said Steve Blair with Rafferty Technical Research in New York. "Are we going to have another year like 2007 where we really did not draw inventories down very much? With the recent warmth and the way the weather forecasts look for the remainder of the winter, I think drawdowns will not be as large as normal. However, you have to remember...all it takes is a couple of real cold weeks to pull a significant amount of supply out of the ground."
In addition to storage, Blair said LNG imports will also be important in 2008. "It will be interesting to see whether or not we see an increase in LNG imports this year. As for the whole idea that some cargoes could be diverted to the higher-priced markets in Asia, I just don't see it happening," he said. "If you are a natural gas producing country in northwest Europe, where are you more likely to send your cargoes? To the East Coast of the United States, or almost completely around the world to Asia? The price Asia is willing to pay would have to well outstrip what the United States would pay due to the difference in shipping costs."
Looking at the 2008 hurricane season, Blair said the recent luck of the United States and of the country's oil and gas interests in the Gulf of Mexico could run out at any time. "What is the likelihood of going three straight seasons without a major hurricane getting into the Gulf of Mexico? The odds that we are going to see one are getting better and better with each uneventful season that passes. Whether it is on the level of Hurricane Katrina remains unclear because there is no way to know that. With winter weather this year already discounted, a hurricane hitting the oil and gas infrastructure in the Gulf in 2008 is the only thing I can really see that would have a major impact on prices."
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