September 3, 2004

by William Burson

The separation of petroleum prices from natural gas prices still has a way to go, for there are a completely different set of fundamentals, says Jim Ritterbusch of Ritterbusch and Associates.

Heating oil is now getting a lift off of macro factors, and natural gas prices have to be forced lower to slow storage injections. So far that does not seem to be working, he said.

"The shrinking contango in the natural gas market has not provided enough of a disincentive to slow down injections and it seems as though some buy and store programs are being worked. The contango has become quite volatile," he observed.

On Thursday the differential between the October and November contracts widened by a good 7 cents, thus those differentials are almost as volatile as outright prices.

In spite of that volatility the price curve shows that the early fall versus the winter portion is certainly weak and continues to widen thus offering a big incentive to store gas.

"The widening spreads end up rationing out the available storage capacity. It simply reflects the different fundamentals for natural gas at the front end of the curve as opposed to the more distant winter months. The front end of the curve is reflecting very weak weather demand and weak cash prices, and the winter is being supported by uncertainties of just how cold winter is going to be," he said.

Ritterbusch correctly predicted that natural gas would fall below $5(GasTrader August 13) and the question is how much lower can near term prices go.

He says that several factors just jump out that indicate further weakness in natural gas prices.

The fact that the market is able to sell off this much in the face of the huge increase in petroleum prices the last couple of days is not helpful. Also the make-up of the open interest is also bearish. The small speculators are long and the large speculators are short and that's a negative combination, he said.

"In addition the funds, the large speculators, appear to have a lot of room to add to their short position.

I have revised my downside to $4.50 to $4.70 and that is a better way to trade. It's better to make gradual adjustments to a market strategy rather than suggest a sensational target," he said.

Forecasting has become more difficult. The volatility is too high. The risk environment is too great.

"Production has increased much more than anticipated," said Ritterbusch.Most of the numbers show an unchanged level of natural gas production, but if storage is backed out of the production figures, it gives a look at underlying demand, and it shows demand has been pretty good, he said.

"It suggests a strong industrial sector, and that's more reason to be bearish. If prices are going to slide this much, and the industry injects this much gas in light of strong industrial demand, what's going to happen if that slows down?" he queried.

Copyright (c) 2004. This report is intended for the use of GasTrader subscribers. No portion of this publication may be photocopied, reproduced, retransmitted, entered into a computer system or otherwise redistributed without prior written authorization from GasTrader.

Visit http://www.powermarketers.com/index.shtml for excellent coverage on your energy news front.