Eyeing Hot Weather, Hurricanes, Gas Prices Could Test Records

NEW YORK, May 1, 2008 (Dow Jones Newswires)

U.S. natural gas prices could move closer toward record highs this summer if gas inventories don't grow substantially over the next several weeks.

As in past years, gas prices will take their cue this summer from the weather, particularly the length and intensity of heat in key consuming areas of the U.S. Midwest and East and whether one or more tropical storms or hurricanes do any damage in the energy producing U.S. Gulf of Mexico.

"A lot of people are looking at natural gas to take out the all-time high this summer or early fall," said Mario Chavez, a broker at UBS Securities in New York. The looming hurricane season, a recent loss of supply from the U.S. Gulf and a drop in LNG imports have been keeping gas prices near $11/MMBtu, he said, still well off a record high north of $15.

Supply also matters. Late winter weather and strong gas demand this year, along with supply constraints, a drop in overseas imports and overall strength across commodities markets have helped push up natural gas prices 51% in the year to date.

Rising prices for crude oil in particular have pressured gas prices higher. Natural gas at times trades in step with oil and refined products, both because it can sometimes be used as a substitute for oil and as weakness in the dollar or in the equities market spurs overall demand for commodities.

Gas price spikes mean higher electricity prices, which would hit businesses and consumers still grappling with record gasoline prices.

Natural gas futures for June delivery on the New York Mercantile Exchange were trading Thursday at about $10.52 a million British thermal units, down 32 cents, after government data were released showing a larger-than-expected build in U.S. gas stocks last week of 86 billion cubic feet.

Private weather forecasters Earthsat MDA and Planalytics are predicting normal summer temperatures in the Midwest, Northeast and much of the U.S., with cooler weather than the last few summers. The National Weather Service forecasts above-normal temperatures for part of the Northeast, the southern Rockies and the desert Southwest, but hasn't predicted summer weather in the Midwest, Texas and other regions.

While gas market participants see the normal-weather forecasts as an indication that demand for gas-fired generation for cooling could be lackluster, they're also watching inventory levels, which are slightly below average and well below the surplus at this time last year.

Hurricane Quotient

Forecasters at the University of Colorado and elsewhere are calling for an active Atlantic hurricane season this year, with more tropical storms than average and a better-than-average chance they'll make landfall in the U.S. Hurricane season, between early June and late November, peaks between early August and late October.

The most recent active season was in 2005, when Hurricanes Katrina and Rita ripped through the Gulf of Mexico. Nymex front-month gas futures reached their all-time high settlement price of $15.378/MMBtu that December. Gas prices are seen returning to that level in the event of a destructive tropical storm or a lengthy heat wave in the Midwest and East.

A weather condition called the "Bermuda High" expected this summer could nudge one or more Atlantic hurricanes to U.S. shores, said Jim Rouiller, senior energy meteorologist at Planalytics in Philadelphia.

The Bermuda High is a large group of storms near Bermuda and the Azores in the Atlantic Ocean. It could also bring a longer summer to the Northeast, keeping hot, humid weather in the region through early September, Rouiller predicted.

"Along with that hot, humid weather comes the threat of hurricanes," Rouiller said.

Strong cooling demand that extends into fall would cut into the amount of gas in storage available for use next winter. At 1.37 trillion cubic feet, U.S. gas inventories are slightly below the five-year average and 15.7% below a year ago, thanks to late-winter weather, according to the U.S. Energy Information Administration.

Substantial builds over the coming weeks will be needed to avoid spiraling prices going into the summer, analysts and brokers said.

"If we don't start seeing average builds of plus-65 (billion cubic feet), and do it for a good eight weeks, that's definitely going to provide a floor for the market," said Gene McGillian, a broker and analyst with TFS Energy Futures in Stamford, Conn.

Need For Storage

Entering the summer with lower-than-normal gas inventories could leave little wiggle room as air conditioners ramp up, boosting demand for gas-fired electricity. Gas consumption by power generators has jumped by nearly a third since the start of the decade, and by more than 10% in 2007 from the previous year, according to the U.S. Energy Information Administration.

In the event of normal weather, an uneventful hurricane season, increased domestic gas production and an economic slowdown, companies would be able to beef up stocks before winter, and gas prices would likely fall.

"If all goes well, and we don't have out-of-control heat, or a hurricane, we can do it," said George Hopley, analyst at Barclays Capital. However, "if we're going into a summer where we have a withdrawal...you really have to do your yeoman's work (building stocks) in May and early June."

The gas market is also monitoring domestic production for price cues. U.S. gas output is expected to rise, on average, by more than 1.5 billion cubic feet a day from last year, with new supplies coming from the Barnett Shale and other areas of Texas, and from Wyoming, said Ed Kelly, vice president of North America Gas & Power at Wood Mackenzie. However, gas production has been down the last three weeks due to an outage at the Independence Hub, a major U.S. Gulf gas platform that produces up to 10% of the region's gas.

NEW YORK, May 1, 2008 (Dow Jones Newswires)