Natural gas futures have done a “far better job” of predicting gas prices than oil futures have done in forecasting oil prices, a noted energy economist said Wednesday.
“They [gas futures] were a little low in those early years, but by the time we got to 2004, they were pretty much on target,” said Adam Sieminski, chief energy economist for global markets and commodities research at Deutsche Bank AG, during the Energy Information Administration’s (EIA) annual energy outlook conference in Washington, DC. “The only thing that the [gas] futures market missed was that big spike in 2005,” which was caused by Hurricanes Katrina and Rita. “That was a hurricane…You can’t predict the weather,” he noted.
“I think in the short run it [gas futures market] may be providing a relatively decent look into where things are going,” with more accuracy than oil futures, he told NGI. “Maybe those futures market forecasts for 2010, 11 and 12, which are around $7 or $8, might not be such a bad guide.”
As for other natural gas price indicators, “storage doesn’t really seem to matter a whole lot anymore,” Sieminski said. “You do get a little bit higher prices with lower storage, [but] it’s not as important as it used to be.”
He further sought to dispel the notion that speculators drive up natural gas prices. He cited a recent World Bank study that concluded speculative activity tends to follow prices rather than lead prices, and that speculators add liquidity to a market. “That’s actually good. It makes the market more liquid and less subject to price spikes,” Sieminski said.
Speculators “might exaggerate a trend, but they don’t create a trend,” he told the packed EIA conference. Weather causes prices to move, he noted. There’s been “a lot of talk” about the possibility that the nation is heading into a La Nina weather pattern, which increases the risks of colder winters and active hurricanes, Sieminski said.
A key concern of Sieminski’s is the future of the North American natural gas supply. “I’m worried about the rig count. It has taken something like a 13% per year increase [in the rig count]…over the last five years in order to keep gas production flat,” he said. “North American gas supply, we think, is going to be under pressure from eroding rig productivity. There’s not enough rigs finding enough gas.”
As a result, “the ability of the current rig fleet in the U.S. to generate the supply to meet most consensus estimates for demand over the next few years is actually a bit in question,” the economist said.
In addition, “the push for reducing greenhouse gas emissions is going to put a lot of pressure on gas. And whether there’s going to be enough there or not is an interesting question,” Sieminski said. “I don’t think that we’re running out of natural gas, but we may be running out of the ability to produce the gas in areas that are …politically available,” he noted.
And there’s more bad news. Looking out to 2030, “I think that over that time [period] we may run into geopolitical problems with LNG” (liquefied natural gas) similar to those that have occurred in the crude oil market, Sieminski believes.
On top of that, “there isn’t enough LNG production capacity going into place to meet what appears to be the potential demand over the next 10 to 15 years. So that’s a problem,” he said.
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