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to the American Gas Association, 73 Bcf was withdrawn from underground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
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
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
Roger Tanner, Houston; Dexter Steis; Susan Parker