In what he described as "a contrarian view to what we're hearing in the marketplace," Paul Corby, senior vice president of Planalytics Inc., said Wednesday he thinks natural gas prices could be close to $5.50/MMBtu later this year and possibly as high as $6.50/MMBtu in 2012.
The power of hedge funds and other commercial market participants is helping to pressure gas prices upward, Corby said during a market management discussion at GasMart 2011 in Chicago.
"Gas is going to be a lot more expensive three years from now than it is right now," he said. "It's going to be a lot more expensive than $5 three years from now...natural gas in my opinion could easily go to $6.50 a year from now. It could easily go to $3.50, but I don't think it will go to $3.50. I think it's got more upward pressure than it has downward pressure from where we sit today."
Corby's outlook is much more bullish than that of the Energy Information Administration, which earlier this week said it expects the Henry Hub spot price to average $4.24/MMBtu in 2011 (see Daily GPI, May 11). EIA also said a forecast production decline would contribute to a tightening domestic market next year, helping to push 2012 Henry Hub spot prices to an average $4.65/MMBtu.
With that bullishness in mind, Corby advised companies to hedge gas now to reduce supply volatility, neutralize adverse effects of volatility and gain price certainty.
"Good risk management is the key, and now is a great time to hedge long-term and short-term contracts."
Recent changes to the gas market have altered the traditional pie chart of traded assets, which included only a tiny slice for commodities and other alternate assets, according to Corby.
"Things have changed dramatically. The pie is still the same, it's just the slices which have changed...Commodities have taken on a piece of their own. They've taken on a life of their own. And the most amazing thing is when you look at the commodities markets now, four out of the top five traded [commodities] are energy."
Another significant change is the flattening of the basis, according to Andrew Hess, gas supply director at Integrys Energy Services.
"No matter how you look at it, it's flattening. The big question from an end-user perspective, or even a producer's perspective, is 'do I care that the basis is flattening? I only want to know what's going on in my area,'" Hess said. "If I'm a producer in the Rockies, I think this is wonderful because my gas is becoming more valuable compared to the Henry Hub; if I'm a producer in the Marcellus, not so much. My basis is going down and I'm getting less for the gas that I'm producing. And for the end user, it's the exact same thing -- just a mirror image."
Also shifting are supply resources, according to Patrick McKinnon, associate director of Energy Products at CME Group. He said declining offshore and tight sand production is being offset by rapidly booming production from shale plays.
"The resources that are being developed for shale production are going to be significant globally, which is going to have a push back impact on the value of that gas domestically," McKinnon said. "As LNG [liquefied natural gas] resources develop -- and we're talking about even exporting LNG now from the United States at a rapid rate -- we're going to have a more globally oriented market to the price of natural gas."
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