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NatGas Price Volatility This Winter? It's Plausible

For domestic natural gas, the thrill is gone for volatility seekers. There are opportunities, though, that could put a jolt into the markets, up or down, an expert said in Houston this week.

EBW AnalyticsGroup's Andrew Weissman has been on the road in Houston over the past few days to offer his view of U.S. natural gas markets. The senior energy adviser, who has been a market observer for more than 30 years, shared a panel discussion Tuesday at Energy Metro Desk's Weather & Price Tealeaves II. On Wednesday he was part of the discussion at Genscape Inc.'s first Oil & Gas Symposium.

The comments, while different, shared similarities. The market has been itching for some direction, and Weissman told the audiences that "substantially more opportunities" for price volatility exist than may be immediately apparent.

There are "plausible scenarios that if we have cold weather in November, which is real possibility, that we could see prices jump fairly significantly, similar to what we have seen often in winter and particularly last winter..."

Everyone is trying to figure out if El Nino is the real deal. The gas markets seem to be buying into multiple weather forecasts that call for milder winter temperatures because of a strong El Nino pattern (see Daily GPISept. 21). However, El Nino hasn't always lived up to its reputation. And even if it does occur, that doesn't mean there won't be early, frigid temperatures before milder weather sets in.

"A year ago there was much discussion about the likelihood of El Nino...and what that would mean for winter weather..." As it turned out, El Nino dissipated and "really wasn't a factor at all.  However, a "very mild" start to the winter season could lead to a "very, very weak situation with prices."

Hedge funds "believe there's a good chance that this scenario will transpire," he noted. "After withdrawing from the market over a period for the last several months, they are now aggressively short...Part of the reason for this is the decline in prices."

A "normal" winter with cold temperatures would, per usual, likely nudge prices higher. But if prices were to increase significantly, producers in turn would respond by turning wells to sales -- and more output most assuredly would pressure prices. Takeaway capacity from the Northeast holds "major, major implications for prices across the rest of the United States. The most significant is the potential to increase price volatility."

The "mother of all swings" is coming soon in the form of domestic liquefied natural gas (LNG) exports. "I think there's never been seen an individual use of natural gas of this scale," Weissman said.

When Cheniere Energy Inc.'s two export terminals on the Gulf Coast enter service, up to 9 million metric tons/year could be transported overseas. That's "potentially...as much gas for LNG export as the state of Texas uses for power generation -- the same scale by one company with a limited number of customers."

And the swings in the weather could lead to volatile situations. During a cold winter, particularly if global oil prices were to soar higher, "LNG facilities could run flat out all year long, and we would push demand for natural gas in the United States to very high levels...Then we could easily see the following year having milder weather through much of the Northern Hemisphere, with low prices, where those facilities go from 100% from maximum down to 60%."

Nuclear outages in previous high-demand years is "kid's stuff compared to outages forced at LNG facilities that are much larger gas users on a period of weak demand...We could see periodic price collapse over much of the United States..."

Another is that oil prices may collapse further.

"Let me say, our view is that there is a very significant chance that oil prices will go back down sometime in the next several months," Weissman said. "Frankly, we are more certain for early next year they will go down further and slow down near term."

His uneasiness in part concerns the recent security pact announced between Russia, Iran, Iraq and Syria, ostensibly designed to combat regional terrorism. The pact could give energy superpower Russia more control over the Middle East, which may not sit well with Saudi Arabia.

"There's a substantial risk...a plausible scenario...that the Saudis would go flat out with maximum production with the deliberate intent to cripple Iran, Iraq and Russia." Russia and his new allies then could respond "by also pumping every barrel they can...Over time, they won't have the cash flow to fund development and production will go down.

"In other words, it would be a fundamental geopolitical change. No one knows how the actors will respond, but it may be an all-out war for market share and cash."

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