Gas Bubble Ready to Pop
By JERRY A. DICOLO
Prices have climbed 23% this year. But there's too much supply and fading demand, so long investors should think about selling.
The rally in natural-gas prices looks set to fade.
Futures have surged 23% this year, reaching the highest level in 20 months Friday. But despite the recent gains, many analysts believe that gas futures rose too fast, and are still too high—and ripe for a big pullback.
"Once the cold winter weather passes, we think support is likely to prove flimsy," said Credit Suisse analysts in a research report late last month. The bank recommends that investors start preparing for a price decline.
A blast of chilly weather at the tail end of winter was the primary cause of the rally. March temperatures were colder than normal across much of the U.S., which increased demand for gas-fired heating and resulted in a steep decline in U.S. natural-gas stockpiles.
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The drop in inventories removed the biggest weight on prices over the last year and a half—too much supply thanks to vast amounts of the fuel unlocked from shale-rock formations by new drilling techniques, which sharply increased U.S. production. This time last year, U.S. gas reserves stood roughly 60% above five-year average levels—and prices were on their way to a 10-year low of $1.907 per million British Thermal Units, notched last April.
On April 4, the U.S. Energy Department said that stockpiles fell below the five-year average for the first time since September 2011—to 1.687 trillion cubic feet last week, or 2.1% below the average. Natural-gas futures rose 2.5% for the week on the New York Mercantile Exchange, settling at $4.125 per million BTUs Friday. Market analysts are looking ahead to spring, when gas usage by homes, businesses, and utilities typically declines.
Roughly half of U.S. homes use natural gas for space heating, and many more have electric heating powered by gas-burning utilities. When temperatures rise, gas demand drops.
That factor leads to stockpile gains every summer. But gas being pricier near $4 per million BTUs, investors may have reason to worry about a bigger increase in reserves.
SOME MARKET WATCHERS are concerned that the rally that took gas to its current $4 level will also lead to reduced demand from utilities. Over the past year, power plants took advantage of low prices and shifted to burning gas instead of more expensive coal, raising demand for the fuel and helping to shrink the U.S. supply glut. There are signs, however, that utilities are already dialing back their move to natural gas.
Teri Viswanath, senior natural-gas strategist at BNP Paribas, pointed to data from the U.S. Energy Department released last week that showed gas usage by electric utilities fell by 0.6 billion cubic feet (the measure for stockpiles) a day in January compared with January 2012.
Ms. Viswanath says that "unexpected weakness" could mean utilities aren't as keen on gas at these price levels, which could mean price declines are ahead. Meanwhile, Credit Suisse analysts are forecasting a drop in electric-power demand of two billion cubic feet per day this summer, which would likely help to push stockpiles higher.
Natural-gas bulls have fought back from decade lows to stage a startling rally over the past year, but it looks like now is the time to declare victory, and to take profits.
JERRY A. DICOLO covers commodities and other topics for The Wall Street Journal.
E-mail: editors@barrons.com
