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Cash, Futures Markets Hit All-Time Highs, Prompt Hearings

Cash, Futures Markets Hit All-Time Highs, Prompt Hearings

Natural gas cash and futures markets entered the stratosphere last week as cold weather, soaring demand and substandard storage levels led to new all-time high prices and prompted the U.S. Senate to schedule hearings on the situation.

Near-month gas futures on the New York Mercantile Exchange soared to a new all-time high of $9.539 ($9.00 if you include only the regular open outcry sessions) in Access trading early Thursday morning. Boosted by what might have been one of the most bullish weather forecasts to hit the industry in years, the futures market spiked dramatically in multiple buying surges last week as traders pressed the envelope of their long exposures.

According to esteemed industry weather forecasters Jon B. Davis and Mark Russo of Salomon Smith Barney, the myriad of computer models [last] Monday morning were pointing to a massive Arctic air mass surging from the Polar regions down into the U.S. this week. "This air mass is extremely impressive and is expected to be in the range of about 1,050 millibars (the standard unit of measurement for atmospheric pressure) when it moves into the Northern Rockies.... Keep in mind that we have not had an Arctic air mass this strong move into the lower 48 during the past four winters," they wrote last Monday in SSB's daily Energy Weather report aimed at heating oil and natural gas markets (see related story this issue).

The supply side got its own share of bullish news last week. According to the American Gas Association, 73 Bcf was withdrawn from underground storage facilities during the week ending Dec. 1, bringing working gas levels down to 2,429 Bcf, or 74% full and causing the year-on-year deficit to surpass the 500 Bcf mark for the first time since February.

When all the dust had cleared, orders tabulated and heart medication taken, the numbers were staggering. The January 2001 gas futures contract gained $1.911 last week to close at $8.584, the highest settle in the commodity's 10-year history. The price action was so dramatic that twice last week Nymex was forced to raise margin requirements to keep pace with the escalating price level. On Thursday, Nymex changed the rules pertaining to trading halts that are initiated when the market moves too much, too fast in one direction.

Meanwhile, cash traders could not have been prepared adequately for the sticker shocks last week despite past periods of huge price volatility. The all-time daily cash market high of $39, set at the Chicago citygate in February 1996 was surpassed last Wednesday by a Southern California border peak of $41. But it was a short-lived record as prices surged to a new high of $53 at the Southern California border on Thursday and reached yet another record of $61 at PG&E's Citygate on Friday.

Unlike previous major cash market upturns, however, the price spikes last week were not limited to one or two market areas or a single market point. Now virtually all trading points are exploring previously unknown price territory. And with storage at substandard levels even before the official start of what promises to be the coldest winter in several years, this bull market appears to have considerable staying power.

Another significant development is the size and solidity of the base from which cash prices were shooting higher last week. It used to be a major trading event when one or two cash points would become conspicuous by soaring a few dollars above an overall market range of something like $1.50-$2.50. But until Friday's softening last week, NGI's Daily Gas Price Index had almost every point averaging more than $8, topped off by $27-plus averages in California and the Pacific Northwest.

These lofty market levels did not just appear out of nowhere. In mid-December 1999 swing prices ranged from the $2.40s in the production area to around $2.90 at Northeast citygates. By the start of June 2000 the range had risen to the $4.00s-$4.40s for all markets except the lagging Rockies. It was then that the reality of natural gas having more than just its traditional winter peaking season was made manifest.

Up until the mid to late 1990s traders took advantage of typically low summer prices to buy gas for storage, re-selling that same gas at higher prices in the winter. But this year the summer injection game was more difficult to play than ever before. Ever-growing demand for power generation meant air conditioning load in hot areas competed pricewise for the storage injection molecule.

The result was a near-steady upward march of prices, interrupted by occasional setbacks, since last spring. Along the way, concerns kept rising and subsiding about whether there would be enough gas in storage to meet the upcoming winter. In December, the answer seems to be: too close to call, but it very well could get dicey.

Senate Calls Hearing

Concerns about reliability and record high price levels, prompted Republicans and Democrats on Capitol Hill to agree on at least one thing last week: the natural gas market is not in good shape heading into winter. Chairman Frank H. Murkowski (R-AK) of the Senate Energy and Natural Resources Committee and Ranking Minority Member Jeff Bingaman (D-NM) called for an oversight hearing to look into the escalating gas prices.

The hearing is scheduled for 9:30 a.m. on Tuesday (Dec. 12) in the Senate Dirksen Building, Room 366. Appearing before the committee will be representatives of the gas industry and the Department of Energy's Energy Information Administration. At press time Friday, the Senate committee did not have a list of witnesses who would testify.

"We are concerned about both price and availability of supply as we move into the winter months," Murkowski said in calling the hearing. "Spot prices for natural gas on Dec. 6 hit $9.54/MMBtu. That compares to a price a year ago of about $2.16/Btu."

A committee spokeswoman indicated that some of the issues to be addressed at the hearing would be a "precursor to the energy package" that Senate Republicans intend to introduce next year.

The Natural Gas Supply Association (NGSA), which represents major producers, plans to address the Senate panel. Its message will be - "there's a confluence of factors that are impacting the price now - demand, weather, fuel oil's tight and 'perceived' supply shortages," said John Sharp, vice president for the group.

"All of these factors are converging at this point in time, and are having an impact on the marketplace," he noted. "All aspects of our industry are really under a great deal of pressure right now. Producers are producing at record levels. You couldn't find a rig out there if you wanted to right now. Pipelines are running at full capacity. Distributors are moving gas to their customers the best way they can, and electric generators are competing for gas," Sharp said.

"It's the marketplace that we always wanted, but clearly we probably were looking for something that was a little bit more transitional."

NGSA President R. Skip Horvath cited activities of the Natural Gas Council, an amalgamation of organizations representing producers, pipelines, distributors and marketers, to maintain communications at all levels of member companies to ensure reliability of the system.

"The natural gas market at this stage of mature development is a liquid and competitive market that will get through any short term situations that occur this winter. Across the industry, through all sectors, we have pledged to honor our contracts so the market will clear and the forces of supply and demand will work." The system has successfully served through 15 years as a competitive market, and "we are highly confident it will continue. I think the entire industry is fully aware what's at stake here."

Roger Tanner, Houston; Dexter Steis; Susan Parker

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