Sparked in part by bullish comments from Federal Reserve Board Governor Ben S. Bernanke on Thursday, November natural gas futures shot above the psychological $8 level in Friday trading to notch a new annual high at $8.23 before settling at $8.105, up 40.8 cents on the day. Friday capped off a meteoric increase for the week, which ended $1.396 higher than the previous Friday’s settle of $6.709.

“I think our initial price target of $8.28 is looking better and better,” said a Washington, DC-based broker. “I don’t think we will hit it today [Friday], but if we had one more trading day in the week, we might.” Looking for an explanation for the run-up Friday, the broker dismissed the National Oceanic and Atmospheric Administration’s updated forecast as “a mixed bag” (see related story), but did point to Bernanke’s comments as a possible catalyst.

The broker said he believes that while Bernanke’s speech focused on oil, it definitely impacted all of the energy markets. “Remember this is the Fed governor who really is sort of the second voice behind Federal Reserve Board Chairman Alan Greenspan,” the broker said. “This is not a lightweight…when he talks, the world listens.”

Speaking at Darton College in Albany, GA, on Thursday, Bernanke implied that the price run-up in the energy complex is on fundamentals and is not something that can be fixed overnight.

“Models of commodity-price ‘overshooting’…imply that the current surge in oil prices will be almost entirely temporary, a prediction strongly at variance with market expectations as revealed in the futures markets,” Bernanke said. “I conclude that an increasingly tight supply-demand balance, rather than speculation or easy monetary policies, probably accounts for most of the recent run-up in oil prices.

“I would not rule out the possibility that uncertainty about future energy costs has made companies a bit more cautious about making new capital investments,” Bernanke said. “However, probably more economically significant than near-term uncertainty about oil prices is the fact that traders appear to expect tight conditions in the oil market to continue for some years, with at best only a modest decline in prices.”

Bernanke added that this belief on the part of traders can be seen in the prices of oil futures contracts. “Throughout most of the 1990s, market prices of oil for delivery at dates up to six years in the future fluctuated around $20/bbl, suggesting that traders expected oil prices to remain at about that level well into the future,” he said. “Today, futures markets place the expected price of a barrel of oil in the long run closer to $39, a near doubling. Thus, although traders expect the price of oil to decline somewhat from recent highs, they also believe that a significant part of the recent increase in prices will be long-lived.”

In addition to Bernanke’s comments, the broker said the current natural gas storage situation might also ironically be to blame. “Everybody’s asking ‘how do you have $8 gas and 3.2 Tcf in storage to start the winter?’ They just don’t seem to jibe,” he said. “Perhaps 3.2 Tcf just isn’t a relevant number anymore for the size of the natural gas economy that we have.”

The broker noted that during the winter most of the gas consumption draws directly from the wellhead, with storage as a cushion. “If we have continued production declines in the Gulf of Mexico…that does not paint a rosy picture, which will be solved by the price action moving up and rationing out the demand. I hate to say it, but it doesn’t seem to me that this run-up is all fund action. I think it is people making educated bets on the market,” he said, referring to possible commercial speculative trading.

The market’s reaction following Bernanke’s speech drew comparisons to a similar cause-and-effect event last year (see Daily GPI, May 22, 2003). In May of 2003, natural gas futures shot higher following Greenspan’s testimony before the Joint Economic Committee in which he expressed concern over high natural gas prices and tight supplies. In that instance, local traders led the rally at Nymex, which propelled the June contract to a $6.33 early afternoon high.

Looking on to the December contract, which will take over soon as the front month, one almost has to avert their eyes from the current price level. IFR Energy Services’ Tim Evans said, “December natural gas has surged to a new high, trading to as much as $9.13. This puts prices to levels not seen since February 2003, when open outcry trading peaked at $10.10 and the overnight Access dealings included one trade at $11.899.

“We do note that this spike corresponded with a year-on-five-year storage deficit of as much as 640 Bcf and the bitter cold that helped create that drain on inventory,” he said. Evans added that this fact further suggests that this current market is not only getting overbought, but also overvalued.

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