Friday, August 21, 2009

Sinking Feeling

More like a crushing feeling. Now that the natural gas futures have broken through the $3.00 level, the Henry Hub natural gas spot price joined the fun in a big way and dropped 8% to $2.78/MMBtu.

Everyone is looking at the same data: natgas consumption is down, surplus storage is filling up and production keeps increasing. Experts are waiting for the storage to be full and the pipelines backed up. That's about the only way to get the producers to stop pumping gas. Since many producers are hedged at $6 to $7, they aren't feeling the pain the way the guys at the wellhead feel it.

Analysts are talking about spot gas at $2.25 to $2.5o in September. The December futures contract has fallen to $5.03, down from $6 recently, so much of the optimism about the ship righting itself before the end of the year is fading.

It got so bad today that the ratio between oil and natural gas got to 25x (oil had an OK day). the 19 year average is around 9.35x, as shown on the graph below from an article by CNBC (the graph is sort of useless because there are no X axis labels, but I believe it's a date range from 1990 to the present). I've already stated my belief that oil and gas now trade independently so the growing gap in this ratio will not force gas prices to rise or oil prices to fall, but it's interesting to see the divergence.

Have a nice weekend.

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