Thursday, September 10, 2009

Making Green in a Sea of Red

The Wall Street Journal had a good article today on three types of market participants that are making good money in this depressed price natural gas market (link good for at least a week).

First, the article talked about traders who are taking advantage of the steep contango with gas prices. This link better describes contango, but it is a situation where the future prices for a commodity are significantly higher than the current prices. This allows an entity, be it a hedge fund, electrical generator or trader, to buy gas at low current prices (spot price is $2.68/MMBtu today) and lock in a sale at a higher future price (October 2010 price is $5.89/MMBtu). The gas is stored somewhere for a year and then delivered to the buyer.

The contango trade and the diminished natgas consumption creates the second big moneymaking opportunity: natural gas storage. As storage facilities, which are everything from tanks to empty salt domes, fill up they can charge a premium for storing more gas. Gas storage rates are not regulated, so the market price reflects the degree of the need that is being satisfied.

The third profitable area is in natural gas liquids (NGL) separation. Petrochemical producers are using NGLs like ethane as a feedstock in making plastics, and companies that provide a process called fractionation are doing well. Usually this feedstock comes from oil, but because the ratio of prices of natgas and oil, which are usually aligned, has separated badly (the normal 6:1 ratio jumped to 37:1 on Friday before recovering to the mid-20s), natgas products are much more attractive. Many in the market believe that gas will remain cheaper than oil on a per energy unit basis for a while so the fractionation business might be a good place to be. While this creates new customers for natural gas products (although NGLs are not present with all gas), it is dependent on continued low prices of natgas.

I’m happy for these folks making money in a down environment, but their success depends on natural gas prices being cheap for the foreseeable future, something I don’t want to see come to fruition.

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