Monday, August 31, 2009

Natural Gas price

Natural gas is a cyclical commodity. Unlike the oil market the adaptation of natural gas prices is much longer. There is no organization that would maintain the quota extraction or had an interest in the price level. Adaptation takes place through the market and it takes longer.

Natural gas futures price is subject of many discussion right now. Henry hub contracts went all the way down from $13,5 to $3. September contract finished even below the level $3 at 2,84.

The main reason why natural gas is traded at lows is high level of storage. We are 18% above the 5 years average and also 18% above the level year ago (based on EIA statistics in weekly report).

Another reason is weather. Cold summer in US which has impacted lower consumption of natural gas.

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Reference indicator, which tells how the market works on the production, the number of active wells in the U.S. Currently there are 675, the lowest number in past seven years. While the oil market has released the taps, the gas is still waiting.

There are some other arguments for price growth. If economic conditions will not worsen, it will not cause long-term decline in demand for energy commodities. Another aspect that has or may play a role in the demand for natural gas is that natural gas is a substitute for oil and it has higher reserves.

Natural gas prices follow with some delay crude oil prices. The gap between these two commodities is increasing. On average crude oil is 10 times more expensive than natural gas but right now the ratio is 24.

Last but not least is natural gas seasonality. Usually second half of the year is stronger for natural gas prices.


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