Fashioning a Buying Strategy on 'Price Geometry'
"Too little gas in storage is a very dangerous thing," Houston analyst Arthur Gelber, told attendees at the LDC Forum in Atlanta Tuesday.
Gelber, president of Gelber & Associates, said his analysis shows that in the past if storage fill is adequate, winter prices tend to crash. If it is not adequate, the market "is vulnerable to winter price spikes." This coming winter the magic number is 2.95 Tcf by Nov. 1, he said. Below that level "is really dangerous."
How should buyers deal with the volatile market? Gelber told distributor representatives they should create a supply methodology, including a price forecast, and stick to it. He advised against indexing, since indexes record some of the highest prices. Also, don't rely on Nymex for price forecasting. "Nymex is always wrong, never right.
"Be proactive; don't react. Natural gas is too volatile to have an ad hoc approach to procurement and price risk management." Buyers should adopt a portfolio strategy, including daily, monthly and forward contracts and using puts and calls. They should find a good price forecast and use it to identify market patterns.
It's not about the actual price, it's about the relative price, or "price geometry," identifying the best time to buy. Gelbert pointed to two key buying windows, one in the late winter-early spring and one in the fall. "If you bought summer gas on Feb. 23, in 11 out of the last 13 years you would have saved or made money. That's an 85% success rate," Gelber said.
Another panelist addressing the supply issue set the 2.8 to 3 Tcf level for storage fill by Nov. 1 as absolutely critical. "We must get to 2.8 to 3 Tcf even for an average winter," said Les Deman, director of fundamental research and analysis for Shell Trading Gas & Power. He said industrials and power generators must give up about 2.8 Bcf/d of gas this summer to assure storage fill.
Meanwhile, what happened to the continuing upward curve for the natural gas market leading to 30 Tcf by 2010? Deman called it "the grand illusion" that was based on the false premises that both gas supply and demand were price elastic. Neither are. Demand has lost its elasticity because little of the new power generation load has oil back-up, and even if it did, federal, state and local regulations would limit its use.
Supply is restrained by similar environmental restrictions, which limit access to land and limit disposal of water from producing wells. Plus, the modern producer has a cash flow management approach to E&P, including a just-in-time inventory.
"Natural gas is moving to the top of the food chain," Deman said.
There were differing opinions as to the potential in the Gulf of Mexico (GOM). Deman pointed out that deepwater discoveries are "getting oilier. Gas production could peak in the next few years." The U.S. is a very attractive market for LNG, however. With the current four U.S. terminals, including Cove Point, MD, which is due to go into service soon, he expects LNG imports to double.
Others see the deepwater Gulf as steadily increasing production, making up for the declines on the shelf. Orlando Alvarez, BP's vice president for the eastern United States predicted production from the deepwater GOM would go from about 4.5 Bcf/d to 10 Bcf/d.
Columbia Gas Transmission's Steve Becker also saw great prospects for deep Gulf production. The pipeline infrastructure to bring in the gas is the critical factor now, Becker said. He said a number of projects by various companies are underway and will be showing up soon to tap new production.
In the short term, however, both Becker and Alvarez worried about the summer. Providing power generation load, filling storage and doing the usual pipeline maintenance will be "a balancing act" this summer, Becker said. So far throughput is higher this year than it has been in recent years. The wild card, as usual, is the weather and the two H's, heat and hurricanes.
Meanwhile, illiquidity and a lack of credit are primarily responsible for the highly volatile natural gas prices, Alvarez said.
"It's hard to find counterparties to trade with." He responded to the industry discussion about reporting fixed price transactions to trade publications. "What do you report if you don't have counterparties to trade with?" He said BP is working aggressively to find trading partners, noting there are some new market entrants. But, he expects to see "pricing volatility until we fix [illiquidity and lack of credit]."
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