Friday, October 2, 2009

Crash!

Or “Thud!” Whichever word you choose, the 20.5% plunge in the Henry Hub natural gas spot price made an awful sound. The spot price dropped 60 cents to $2.32. This appears to be an indication that the storage issue, at least storage in key places, will absolutely kill prices until the winter heating season begins. Interestingly, the November futures contract closed up 5.5% at $4.71, so this hopefully will be a temporary problem.

I've read some articles with people saying that gas could go to zero until the storage issue is resolved. I don't think that will happen. If gas is super cheap for a month, it will be snapped up by electricity producers. They will turn down their coal plants and burn lots of cheap gas. That should keep it above zero. Where the equilibrium lies, I don't know, but I suspect it is below $2.32, so buckle up tight and don't expect big royalty checks in January when your Christmas credit card bills arrive.

Man, I wish I had the wherewithal to buy lots of natural gas at $2.32 today and then sell it on October 29 (the day the November contract expires) for $4.71. That quick doubling of your money would imply an internal rate of return of 1,436,677%! Of course, you’d have to find some place to store that gas for a month.

No comments: