Warm Weather, Cool Economy Push Natural Gas Prices Down
Natural gas prices plunged 15% in commodities trading Monday on forecasts of warmer weather in the Northeast and Midwest as well as growing fears over the economic slowdown and its effect on energy demand.
Monday’s decline, the steepest in a decade, reversed a short-lived spurt last week when forecasters said harsher, not warmer, weather was on the way. The plunge is the latest in a sharp monthlong falloff in gas prices from the all-time highs set in late December.
But analysts said nothing has happened to ease the long-term supply shortage of natural gas that has fed the California energy crisis and undermined prospects for economic growth across the country. That won’t change until more plants and pipelines are built or demand is somehow curtailed, experts say.
Nearest-term contracts for March delivery of natural gas dropped Monday by $1.04 to $5.71 per million British thermal units on the New York Mercantile Exchange. It was the largest one-day decline since trading began in April 1990.
The falloff came as the weather forecast changed from subfreezing temperatures in the Chicago area to temperatures of 40 degrees or higher. Above-normal temperatures also are expected in New York this week.
“Extended forecasts Friday were calling for continued cold weather so when they changed the forecast today, it caught the market by surprise,” said a trader at Alaron Trading Corp. in Chicago. “So it’s not a question of fundamentals. Traders got caught up in their positions.”
Others weren’t so sure. Alan H. Struth, manager of petroleum market analysts for Honeywell Inc. in Houston, said the nation’s economic news keeps getting “incrementally worse,” which is affecting energy markets.
“The economy is slowing and gas consumption tends to be sensitive to the economic cycle,” Struth said. “The stone industries--clay, cement and concrete--use a lot of gas and their margins have been hurt by high gas feedstock prices. So have the steel, chemical and glass industries.”
Natural gas has been tumbling since Dec. 29 when spot prices on the New York Mercantile Exchange hit an all-time high of $10.10.
March contract prices for gas typically decline from February on as the winter heating season ends. But markets in recent months have defied conventional wisdom, rising because of higher than expected consumption and lower than expected production. California’s energy crisis has been caused in large part by skyrocketing gas prices, which are up dramatically from $2.58 a year ago and $1.62 in March 1999.
Struth said the supply outlook is improving due to increased drilling that is expected to bring more supply to market in coming months, thereby easing prices.
But the depth of the problem was underscored Monday when a study for New England’s Independent System Operator warned that more natural gas pipelines must be built before 2003 or there will be insufficient fuel for the approximately 20 new power plants coming on line in that region.
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Back to Earth
The big run-up in natural gas prices that shook California and other energy markets has abruptly subsided as weather and economic activity ease.
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Monday: $5.71, down $1.04
Source: Bloomberg News
