Natural gas prices continue dramatic climb - Jolt may be less on utility bills

www.nola.com Wednesday February 26, 2003 By John M. Biers Energy writer

For the second day in a row, spot prices for natural gas soared to historic highs on Tuesday, jumping almost 50 percent in what one trader called panic buying to close at $19.38 per million Btu on Louisiana's benchmark Henry Hub exchange.

The price spike has been prompted by the latest stretch of cold weather in the Northeast and Midwest, which is expected to continue a brutally cold winter that already has diminished natural gas supplies. Despite the cold weather and low supplies, the energy industry has been slow to pick up natural gas drilling this winter.

Gas-shortage fears spread through the market this week, as utilities and other buyers purchased their gas for the upcoming month, said Dan Pickering, an analyst for Simmons & International, a Houston investment bank specializing in energy.

"It's obviously panic buying driving this thing and there are some guys hung right now and nobody seems to want to sell it," Brad Florer, a trader for APB Energy in Louisville, told Bloomberg News.

The spike is even more dramatic than the jump two years ago, when prices jumped above $10 per million Btu.

A top regulator with the Federal Energy Regulatory Commission said Tuesday he will review recent trading of natural gas futures, Bloomberg News reported.

Natural gas, widely used for home heating, normally sells for roughly $2 to $4 per million Btu. In recent weeks, however, prices had climbed to the $5-$6 range.

Only about 5 percent of the nation's natural gas is bought on the spot market. Most gas is bought on monthly contracts for future delivery. Futures prices were high Tuesday, but not nearly as dramatic. On Tuesday, the March price was $8.90, while April was $6.40 and May was $5.70. This decline suggests the market anticipates the price spike will be short-lived, Pickering said.

Locally, the price spike is expected to have a limited effect on utility bills -- as long as it is short-lived.

Natural gas prices have been trading well above historical levels this winter. Many locals were shocked at their February heating bills, which were more than double the amount some customers paid in January.

Entergy spokesman Chanel Lagarde said the effects of this week's price surge are "minimal."

"The recent increase in the price of natural gas will affect the gas adjustment of customers' bills," Lagarde said. "However, the increase will not be as dramatic as the increase in the spot market."

Citing proprietary concerns, Lagarde declined to give specifics on Entergy, but said the company purchases "very little" of its gas on the spot market. About one-third of Entergy's gas was bought last summer under a hedging program, in which prices were locked in at then-prevailing rates. Most of the remaining two-thirds was bought under monthly contracts for delivery in early February, when prices stood in the $6 range.

But if the prices stay lofty, much higher natural gas bills eventually would result.

The high prices are also a burden for Louisiana's vast petrochemical industry, which relies on natural gas to run facilities and to serve as a feedstock in some operations. This winter's high prices are having a "very significant" impact, said David Brignac, spokesman for Shell Chemical Co. in Norco.

Natural gas represents more than 70 percent of cash costs for some commodity chemicals, such as ammonia, according to a Lehman Brothers report released Feb. 19 before this week's spike.

Pointing to "natural gas fever," Lehman Brothers chemical industry analyst Sergey Vasnetsov echoed other experts who have pointed to a new, higher "normal" range for natural gas in the $3.50-$4 range through 2006.

"We would love to see the price return to $3 or below, but should not count on relief given the tight U.S. supply and likely prospects of rising demand for natural gas," Vasnetsov said.

While this week's dramatic jump in natural gas prices may shock the public, energy analysts have predicted increased volatility for years, with some even speaking of a possible "train-wreck" this winter.

One central factor is the dilemma faced by energy companies, which encounter pressure from Wall Street to focus capital spending only on giant discoveries. The problem in the United States is that many of the fields already have been tapped, which requires companies to spend more money on lower-yielding fields.

This winter's high natural gas prices have been accompanied by lofty crude oil prices, which are socking consumers at the pump. Despite growing complaints from lawmakers, Secretary of Energy Spencer Abraham on Tuesday told a congressional hearing that the Bush administration would not release oil from the Strategic Petroleum Reserve based on price fluctuations.

Spot crude prices dropped 74 cents Tuesday to close at $35.96 on benchmark west Texas intermediate. The high prices stem from a lengthy fuel interruption in Venezuela and anxiety over a possible war in Iraq.

. . . . . . . John Biers can be reached at jbiers@timespicayune.com or at (504) 826-3494.