Finally, some price relief
August 4, 2008
July 18—At press time, we were in the midst of the first meaningful natural gas and oil price decline of 2008. On July 7 the opening natural gas market price was $13.50/MMBtu. On July 17 the closing natural gas market price was $10.64/MMBtu, a 21 percent drop. Crude oil also experienced a drop, although not as dramatic. On July 7 crude opened at $144.27 per barrel and closed July 17 at $129.29 per barrel, a 10 percent drop.
The previous "big move" down for natural gas this year was mid-March when the market dropped from $10.23/MMBtu to $9.02/MMBtu. By mid-April prices rallied, reaching a high of $13.57/MMBtu in early July. Is the recent market decline for real and does it represent the beginning of even lower prices, or will we again rally back and blow through the high?
Unfortunately, I think the answer rests to a greater degree on what happens with oil prices than with underlying natural gas market fundamentals. Arguably, natural gas market fundamentals are as good as or better than one year ago. Liquefied natural gas receipts are off somewhat. However, incremental domestic production appears to have more than made up the short fall. In addition, weather has been moderate. In spite of relatively good fundamentals current natural gas market prices are 63 percent higher than one year ago. The market closing price on July 18, 2007, was $6.53/MMBtu.
Oil prices are 72 percent higher than one year ago. The July 17, 2008, price was $129.29 per barrel and the July 18, 2007, price was $75.05 per barrel. The relevant question becomes: Where are oil prices going? The answer: It depends. If the U.S. dollar continues to weaken and the world economy continues to be robust, oil prices will likely remain high. However, if the U.S. dollar rallies and/or the world economy falters, oil prices may decline further.
Our recommendation is to begin looking at coverage for this fall and next winter, preferably using option structures.
Casey Whelan, vice president of strategic initiatives, can be contacted at cwhelan@usenergyservices.com.
The previous "big move" down for natural gas this year was mid-March when the market dropped from $10.23/MMBtu to $9.02/MMBtu. By mid-April prices rallied, reaching a high of $13.57/MMBtu in early July. Is the recent market decline for real and does it represent the beginning of even lower prices, or will we again rally back and blow through the high?
Unfortunately, I think the answer rests to a greater degree on what happens with oil prices than with underlying natural gas market fundamentals. Arguably, natural gas market fundamentals are as good as or better than one year ago. Liquefied natural gas receipts are off somewhat. However, incremental domestic production appears to have more than made up the short fall. In addition, weather has been moderate. In spite of relatively good fundamentals current natural gas market prices are 63 percent higher than one year ago. The market closing price on July 18, 2007, was $6.53/MMBtu.
Oil prices are 72 percent higher than one year ago. The July 17, 2008, price was $129.29 per barrel and the July 18, 2007, price was $75.05 per barrel. The relevant question becomes: Where are oil prices going? The answer: It depends. If the U.S. dollar continues to weaken and the world economy continues to be robust, oil prices will likely remain high. However, if the U.S. dollar rallies and/or the world economy falters, oil prices may decline further.
Our recommendation is to begin looking at coverage for this fall and next winter, preferably using option structures.
Casey Whelan, vice president of strategic initiatives, can be contacted at cwhelan@usenergyservices.com.
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