Natural gas: Is a price bottom in place?


It looks like the battle over natural gas' price direction has only just begun.

The natural gas bears argue that U.S. stockpiles are likely to approach/surpass a record 3.545 trillion cubic feet as storage tanks and natural caverns reach capacity, due to producers who are unwilling or unable to cutback production, amid the recession.


The natural gas bulls, meanwhile, argue that the fuel is oversold, and that a combination of fuel substitution (natural gas for oil), a U.S. economic recovery, and a probable colder-than-normal winter in the U.S. will spark a rebound in demand. The bulls also argue a natural gas bottom is place at/near $3 per million BTUs (MMBtu). Natural gas traded mid-day Tuesday up 4 cents to $4.87 per MMBtu.

Unknown factor: U.S. winter

What could prove to be a pivotal factor in natural gas' price direction? 'Old Man Winter' himself, particularly weather in the Midwest U.S. Unlike the Northeast U.S., where the dominant fuel for heat is oil, a disproportionate percentage of homes heat by natural gas in the Midwest. Hence, if 2009-2010 becomes a classic Chicago winter, natural gas will head much higher, the bulls argue.

Another factor in the bulls' favor: U.S. manufacturing. If inventory-low factories ramp-up production to restock warehouses to avoid being product-short if the economic recovery intensifies, factories will increase their use of natural gas, putting another upward pressure on prices.

Energy Analysis: The U.S. is brimming with natural gas, but that doesn't mean natural gas prices will collapse - far from it. A cold winter can really cause prices to jump, but assuming a normal winter, the price will likely hinge on industrial use. In other words, watch U.S. GDP and industrial output in the months ahead: if the economic recovery takes hold and factories have to increase output, natural gas will head considerably higher, long-term.
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Last updated: February 13, 2012: 01:46 AM

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