REX pipeline changes basis, pricing nation-wide

April 15, 2010

BY Brad Smith

March 26—Natural gas prices raced to find a bottom from mid-February to mid-March. For the end-user, it is human nature to continue to move price triggers lower with the hope of capturing even better pricing. With spikes in volatility and the usual noise, prices will eventually seek a level representing the current supply and demand balance. There is no doubt things are bearish with net futures short reaching record levels. A bearish view by producers has resulted in high-volume hedging in deferred contracts, significantly flattening the curve. The premium from the prompt month to Jan. 11 fell from $2.41 on Dec. 3 to $1.30 on March 5, before steepening again to $1.51 on March 23. If we get data supporting further increases in production, things are likely to turn lower still in the third quarter. With little threat to the upside, the market is busy trying to "call the bottom." Current price levels are entering a range where factors offering price support are likely to materialize. The question at hand is will the following factors be enough to limit significant downside pressure?

>Current price levels through 2012 are not economical outside of three or four major shale plays. This should limit selling pressure in deferred contracts.

>Storage has been drawn down at a faster pace than last year. With overall heating degree days similar, almost 400 bcf more has been drawn in 2009-'10 than 2008-'09. Utilities typically buy the bulk of hedges in April and May and are expected to be major buyers, replenishing storage.

>Natural gas displacement of coal in power generation is a major demand source at price levels under approximately $4.50 in the Mid-Atlantic and Southeast. While there are a number of headwinds to reach demand levels seen in summer 2009 (2.5 bcf/d), utilities have acquired the skills to switch effectively and significant demand gains will arise.

>Nuclear spring maintenance season peaks in March and April. There are 104 nuclear plants in the U.S. with 12 currently offline. Per the Nuclear Regulatory Commission, average refueling outages in 2008 lasted 38 days.

>Retail and speculative buying in natural gas by end-users and investors may limit downside pressure.

>Lastly, will the global LNG market offer better returns elsewhere as U.S. spot prices approach $4? EP

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