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Natural Gas Prices Rising

Natural Gas
Natural Gas

Since the Deepwater Horizon rig leased by BP caught fire and sank on April 20, natural gas prices have gone up, and gone down and now seem headed north again.

“There were big shorts in the market” and “traders added to their positions last week,” and now, "traders have been talking to me about the oil spill pushing prices higher,” says Addison Armstrong, director of research at Tradition Energy.

“I think there is some of that notion creeping into the market,” Armstrong says.

Christopher Jarvis, Caprock Risk Management president agrees. “With about 15-20 percent of our natural gas production originating out of the gulf, the spill and fallout from it should really crimp new drilling projects," says Jarvis.

"As a result, we believe natural gas prices will rise as existing and new supplies from the gulf slow at a rapid rate, leaving onshore projects to pick up the slack," he says.

Which is not to say there is a meaningful or immediate crimp in supply; but when you add in warm weather and hurricanes, it could change the short-term pricing outlook.

At this time of year, “I have never seen a report that doesn’t forecast an active hurricane season”, says oil and natural gas analyst Nick Pope, Dahlman Rose & Co. Would he go short here? In a word, “No.”

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“With over supply concerns now being muted from what’s going on in the gulf in addition to strong economic data suggesting a rebound in the industrial sector, NG prices are poised to move higher as fundamentals turn positive,” says Jarvis.

Which leaves a market with changing fundamentals and speculative shorts facing factors out of their control.

"I believe that a shift in emphasis toward development and use of natural gas is an increasingly compelling policy consequence of this oil blowout," says Tom Petrie, Bank of America Merrill Lynch Investment Bank Vice Chairman.

"There are already more calls for developing more renewable energy souces such as wind and solar. While this is both desirable and inevitable, it's important to recognize that for every new unit of wind or solar energy supply, there is needed about .6 of a unit of readily accessible (e.g., immediately available) standby supply for when the wind dies or the skies cloud over," Petrie says.

He added, "Natural gas is the only practical source to meet this requirement in size. Thus, emphasizing renewables also carries with it a need for more natural gas projects."

But, another pespective is offered by hedge fund trader Bill Perkins. When asked why natural gas prices are going up, he answered simply, “Heat—won't last long.”