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Beck Study Finds that 'What If' Conditions Could Send Gas Prices to $12

August 22, 2005
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Management consultant R.W. Beck, which said in July that "high oil prices, hot summer weather and hurricanes" could send natural gas spot prices up rapidly this month, noted in a new report that those conditions "have come to fruition." Beck's 2005 calendar year price forecast remains unchanged, at $6.40/MMBtu, but its chief forecaster warned that continued adverse conditions, especially a hurricane threat during Bidweek, could cause prices to go as high as $12 in September.

"We've seen all of the adverse factors we identified in our forecast fall into place," said Catherine Elder, leader of Beck's Natural Gas & Fuels practice. "These risk factors are precisely the reasons for these much higher natural gas prices that we're seeing this summer."

In the report issued Aug. 12, Elder noted that along with oil prices higher than ever, "the International Energy Agency said demand for oil in China is dropping off, but geopolitical events such as Iran's announcement about its nuclear reactor reopening or problems with U.S. refining capacity continue to impose new shock waves that push oil prices to higher and higher levels. We observed that natural gas prices were following oil to a degree, but that gas prices would be even higher were it not for favorable natural gas market conditions. We expect natural gas prices to climb as long as oil prices climb."

Favorable natural gas market conditions, however, have taken their licks, said Elder. "An upper Midwest municipal utility told us that their peaker has run six hours every day all summer on relentless above average (but not extreme peak) temperatures. While the gas market had excess gas to inject at normal temperatures, the heat has been enough to cause injections to back down to below normal levels.

"While the industry is still on track to hit 3 Tcf in natural gas storage for winter, it is true that producers and utilities have been selling and burning gas that otherwise would have gone into storage. The end result is that while we had excess gas in a normal weather condition market, we seem to be short a little gas under the hot conditions that have prevailed to date this summer," she said.

At this time last year, Elder noted that market prices were finally beginning to drop based on high storage inventory and reasonable weather. "Then Hurricane Ivan arrived, damaging production facilities in the Gulf. Prices rose dramatically, then subsided somewhat on reasonable winter conditions. What you should expect now is that if we truly do get a cooling trend for the rest of August and into September and we make it through September Bidweek without a hurricane in the Gulf, natural gas prices will drop back to the $6 to $7 range.

"But if, instead, oil prices continue to rise and the Gulf is hit with a Gulf hurricane during BidWeek, then $12 gas in September or in the winter month New York Mercantile Exchange should not be a surprise at all," Elder added.

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