US natural gas prices may not follow falling crude oil: analyst

Washington (Platts)--19Apr2004

Though natural gas prices in the US have climbed in recent weeks based in part
on the strength of crude oil prices, a fall in oil prices will not necessarily
trigger a fall in gas prices, according to Dallas-based analyst Southwest
Securities. "Since the early 1990s, the relative price of crude oil compared
to natural gas on an equivalent heat rate basis has eroded to the point where
crude oil now trades at a discount to natural gas on a heat rate basis,"
analysts John Gerdes and Brian Kinsey reported. "With residual fuel oil
trading below parity with natural gas since late 2002, the preponderance of
fuel-switching away from natural gas to residual fuel oil appears to have
occurred."

In fact, "we believe, given the premium price of natural gas, industrials and
power generators that could switch did switch to residual fuel oil in 2003,
thus implying an almost complete decoupling of the US natural gas and global
crude oil market aside from the longer-term structural issues primarily
related to the global petrochemical industry," the analysts said. As a result,
"an expected pullback in oil prices would only serve to maintain the current
residual fuel oil/gas relationship favoring residual." And with Southwest
Securities' long-term gas price forecast of $4.75/MMBtu, "oil prices would
have to retreat below $20/bbl for kerosene to achieve price superiority, and
thus initiate another round of fuel-switching away from natural gas."

This story was first published in Platts real-time news and market reporting
service Platts Natural Gas Alert (http://naturalgasalert.platts.com ).

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