Wall Street Journal: Commodities News Headlines

Wall Street Journal - January 9th, 2006

Commodities Report Weather Is Playing a Bigger Role In Volatile Natural-Gas Market By Spencer Jakab Dow Jones Newswires 733 words 9 January 2006 The Wall Street Journal The U.S. natural-gas market, with its huge ups and downs, hasn't been for the faint of heart. Take its track record last year. Futures prices soared 90% from June through early September, crashed more than 20% in just a few sessions ending Nov. 4, soared 35% in the three weeks leading up to their settlement high of $15.378 per million British thermal units on Dec. 13, and then plunged 38% through last Thursday. For consumers reeling from volatility, the bad news is that it may get worse. Observers say the roller-coaster nature of trading is a function of natural-gas prices having grown more influenced by changes in weather than ever before at a time when high prices have eaten into industrial demand. What is more, unlike with oil and refined products, the fact that virtually all supply must come from North America reduces any safety margin that can absorb excess supply or meet extra demand. "We're more sensitive to the weather than we've ever been," said Kent Bayazitoglu, a natural-gas analyst at Gelber & Associates. "It's a little scary as it translates into even more volatility in the gas market." Even after dropping to below $10 per million BTUs, natural-gas prices are about four or five times their level before this decade. This has led industrial use as a percentage of U.S. natural-gas demand to decline to about 33% in 2004 from about 36% in 1999, but the recent price spikes may have accelerated the process. On Friday, the New York Mercantile Exchange's February gas-futures contract finished at $9.632 per million BTUs, down 13.3 cents, or about 1%. Paul Cicio, executive director of advocacy group Industrial Energy Consumers of America, says analysts "have failed to comprehend" the level of the drop in demand from manufacturers "that occurred as a result of high post-Katrina prices." An October survey by the group of its members showed willingness to curtail usage this winter because of high prices. The upshot of the drop in demand is that a cold week in the winter leads to a bigger surge in consumption than existing models predict, and a mild week produces the opposite reaction. Evidence that this is happening came in the past month, which saw two records for gas in storage on opposite ends of the spectrum. A draw from storage of 202 billion cubic feet the week ended Dec. 9 was a record for the date. Three weeks later saw an unprecedented winter buildup in storage of one billion cubic feet. "I think we're seeing that we're getting a lot of sensitivity to the weather because a lot of industrial demand has dropped out," said Mr. Bayazitoglu of Gelber & Associates. Always a weather-sensitive market -- much more than petroleum -- natural gas has become more subject to Mother Nature, and this also extends to the summer. A buildup of gas-fired generation in the late 1990s and early part of this decade has resulted in "peaking demand" -- power needs from generators that switch on only when mostly coal, nuclear and hydroelectric units are unable to meet demand -- being met exclusively with gas. For example, about 18% of power needs were met by gas last May, but in July and August about 25% of it came from gas and much more on hot days when air conditioners were most in use. "Last summer we saw a lot more gas being used as a percentage of power generation than in the past," Mr. Bayazitoglu saud. He noted that good meteorologists will become worth their weight in gold on gas-trading desks. Traders will focus more on weather reports to assess if there is a potential glut or shortage. Another factor that has become important in the past two years is tropical weather. Hurricane Ivan in 2004 was far more damaging to U.S. energy output than any storm in prior years and was followed this year by hurricanes Katrina and Rita, which have caused more than twice as much lost output as Ivan. "You've got to rethink the whole scenario with how the market is meeting its needs," said Guy Gleichmann, president of futures broker United Strategic Investors Group.