While market experts at GasMart 2009 in Chicago could not come to a consensus on when natural gas prices would move higher in a meaningful way, they did agree that when they do, the market will rocket higher and buyers would be longing for the days when they could have locked in supply in the $3.50-4.50/MMBtu range.
Speaking on a panel on Wednesday, Paul Corby, senior vice president of Planalytics, told the audience that “the bottom” was already in and that buyers would be wise to buy now for at least throughout 2010 “No waiting, because it is not coming back down to $2.50 or $3.”
Corby said money is “already flying into commodities” and that crude will be trading at $75-80/bbl in the not-so-distant future and natural gas will be going for $8/MMBtu in the early part of next year.
He added that liquefied natural gas (LNG) will not be coming to the rescue of U.S. demand as once believed. “There is not as much natural gas coming to North America as people think because Great Britain is going to be buying it and Western Europe is going to be buying it,” Corby said.
Drawing from what he learned while earning his masters degree in economics from the University of Houston in 1983, Tom Saal, senior vice president of Energy Trading at Hencorp Becstone Futures in Miami, plainly said, “The cure for low prices is low prices. And the corollary, the cure for high prices is high prices. I did a lot of studying to learn that,” he joked.
Drawing from comprehensive charts that run from the birth of natural gas futures trading in 1990 until today, Saal said the $4.60 price level has played a key role over the years. “The $4.60 price level on a technical basis is a huge number. For practically the first 10 years of trading, the spot contract never got above that level. Once it punched above $4.60, it virtually did not come back below $4.60 until recently. In the few instances we’ve dipped below $4.60, the market explodes [back] above $4.60.
“If the market starts to move away from you, you’re going to have to chase it because the market might not give you a second chance above $4.60…Buyers are at a ‘golden opportunity’ to lock in prices and I would lock in for a long time.” Equating the market’s current posture to someone attempting to hold a basketball under water, Saal said “When it goes, it goes!”
PA Consulting’s Ron Norman said that while the current U.S. rig count has dropped 50-55% its high of last year, the market remains oversupplied. “The thing we have to remember is the rig counts we saw last year were driving substantial production growth, so it is going to take a substantial reduction in the rig count to get back to level ground in terms of production,” especially when considering the drastic reduction in industrial demand, he said. “I do think production will be meaningfully falling off later this year”
Norman said increased LNG flowing to the United States will likely offset the eventual production declines in 2009 and 2010, adding that he sees a “balanced market” returning in 2011 as the drilling falloff leads to more production decline. However, he said, “I don’t expect the market to ever be in balance for very long,” noting that global LNG growth will level off and existing supplies will be drawn away to Europe and Asia in 2012 as U.S. gas demand growth rebounds. In the longer term, Norman said LNG will not play its anticipated role of filling the domestic supply gap. Instead, domestic unconventional gas sources such as shale plays will make up the difference, he said.
Noting that the process of buying gas over the last few years has changed dramatically, Norman said gas buyers need to evolve with the understanding that the strategies that were appropriate the last five years will not be the optimal strategies for the future because more than ever, historical behavior is no indicator of future results.
Norman said the intelligent use of fundamental market models can make portfolio optimization and risk management models more forward-looking, noting that forward curves, volatilities and correlations can all be adjusted to generate new scenarios critical to identifying risks and opportunities.
In order to capture value while identifying new risks as the market evolves, Norman said traders need to identify the drivers of market shifts, use sophisticated models for estimating asset value within a portfolio and have a holistic view of the market, including global LNG, domestic supply changes, infrastructure impacts and underlying demand trends.
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