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Oil Prices Rise, Now Natural Gas On Way Up Too

Monday, 25 Feb 2008 | 4:32 PM ET

It was a rather lackluster session in the oil pits today. The bears tried to sell this morning, but didn't manage to build much momentum--and they may not be able to do so for a while. The April oil contract for NYMEX crude came with 30 cents of $100 overnight and settled just 77 cents shy of that triple-digit mark today.

Stephen Schork, whose newsletter is one of my "must-reads" says this market is definitely getting "comfortable" with oil prices around $100 a barrel. And prices probably aren't going to stop there. Traders continue to point out the historical picture. Oil prices usually hit their highs in the second half of the year, so look out!

That said, what really has this market excited these days is the upside potential for natural gas. Natural gas added only 4 cents today to settle at $9.19, but hasn't traded here since January 31, 2006. Is $10 the next stop?

Natural gas is trading at its highest level in over two years for several reasons:

-The weather, of course, is a key factor. Though some of my trader friends were vacationing in warmer climes last week. Those of you in the New York area know we suffered a serious snow storm last Friday. It's been cold here and is expected to get colder over the next two weeks here in the Northeast, at least.

-Storage levels are getting a little slimmer than the market would like. Withdrawals from natural gas in storage have been a lot larger than the expectations over the last several weeks and a lot more than seems warranted given the winter weather we've experienced thus far.

-The other key driver is IMPORTS. Nearly a fifth (17 percent) of U.S. natural gas demand is met by gas imports.

Merrill Lynch's Franciso Blanch notes that LNG and pipeline imports are on the decline. In a recent report he said liquefied natural gas projects scheduled to come on line this year have been delayed and thus "the LNG supply outlook has deteriorated dramatically." Canada, which provides a good deal of our gas imports, has slashed rig rates due to the low natural gas prices in Alberta, while Canadian demand is rising. Mexican natural gas demand is also growing very strongly, while Mexican supply growth has slowed. "Net, the outlook for U.S. natural gas prices is positive, particularly as we start to approach 4Q08," Blanch concludes.

How high could natural gas prices soar? Well the options market may offer some indication. Trader Ray Carbone says buying of $13 May calls was fast and furious in the natural gas options pit at the end of last week. Perhaps a signal of where speculators see this market heading.

Questions? Comments? energysource@cnbc.com