Natural gas future prices

NEW YORK -- Natural gas prices have eased over the past few weeks, lessening some of the pain for industrial consumers. But in the longer-term, shortages and supply constraints are likely to keep prices high, analysts said.

Natural gas futures on the New York Mercantile Exchange (Nymex) closed at $4.73 per million British thermal units (mmBtu) Tuesday, down from a summer high of $6.50 per mmBtu in early June but still about 50 percent higher than a year ago. Even in an industry where price predictions are notoriously unreliable, almost all analysts agree that the days of $2 natural gas are over.

In its September market outlook, the U.S. Energy Department predicted that wholesale prices would ease to about $4 per mmBtu next year. Current high prices are dampening demand and encouraging producers to put more gas into storage, giving a much-needed boost to inventory levels, the agency said.

But over the past few years, a growth in natural gas demand has coincided with disappointments in supply, as heavily drilled fields in areas such as the Gulf of Mexico produce less gas.

"This is not a failure of markets," Daniel Yergin, chairman of Cambridge Energy Research Associates, said at a conference earlier this year. "Rather, it is the result of disappointing geological experience over the last few years plus restrictions on exploration, combined with a shift to new uses of gas that will certainly grow consumption."

Not only is there likely to be less gas overall, industrial consumers are going to see their share of the total slip. Pressured by environmental concerns, electricity generators are moving away from coal and oil and toward natural gas as the fuel of choice.

Definitive figures are hard to come by, but past estimates by the Electric Power Supply Association, a Washington-based trade group, suggest that upwards of 90 percent of all power plants slated for construction will be gas-fired.

The Energy Department said that gas-generated electricity production actually fell slightly this year as gas prices in excess of $6 per mmBtu encouraged electricity companies to switch to alternative fuels, typically oil. But this is likely a short-term phenomenon. In 1998, industry consumed about 40 percent of all natural gas delivered to consumers and electric power companies about 23 percent. Last year, the figures were about 36 percent and 27 percent, respectively.

There are plentiful reserves of natural gas in the United States that could ease any future supply crunch, but the problem is getting access to them. With the Bush administration's energy bill stuck in Congress and political opposition to new drilling in wilderness areas still strong, much of the remaining sources of supply are expected to stay underground for years to come.

Kevin Foster

kfoster@amm.com

Editor's note: Given its growing significance as a vital input for a wide range of metals producers, AMM today is beginning coverage of the U.S. natural gas market. Major price movements and market developments will be covered, as well as the impact that the natural gas price has on consumers within the metals industry.