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Cold Winter Could Spell Natural Gas Price Bottom

If you’re living in San Antonio, St. Louis or even Albany, New York, you are probably not thinking much about global warming. Abrupt climate change may very well be on your mind. Some thought January started off like early springtime. And, of course, the energy bears were cheering. find out more

But less than ten days ago, AccuWeather’s Chief Long-Range Forecaster Joe Bastardi wrote, “This winter could parallel severe winters of the past.” For the energy bears, Bastardi warned, “Those who think that winter 2006-2007 is going to remain mild are in for a shock.” That shock came this past week and this may not be the last of it. Bastardi believes the current weather pattern could mimic the cold and stormy winters of 1965-66 and 1957-58. “A worst-case scenario would be if this winter plays out as did the winter of 1977-1978.” In a telephone interview with AccuWeather’s Chuck Caracozza, he told us he’s seeing a cold pattern taking shape and that this could play catch up from the warmer December-January many enjoyed.

We asked energy commentator Phil Flynn of Alaron Trading for his thoughts. “If the forecasters are correct, then we may have seen the lows in natural gas,” he told us. “But, we need more than a two-week cold blast. We need something that lasts from February into March.” Flynn believes a winter which some forecasters are predicting could challenge the high gas storage levels. He said, “We have well above the five-year average of storage levels.” And should the weather compare to some of those past winter nightmares? “If we get a good old-fashioned winter, then we might find those storage levels are not as comfortable as we thought.” Flynn also observed, “Then, we’ll find out how adequate those gas supplies really are.”

How comfortable should traders become with those storage levels? According to the International Energy Agency, the world’s focus on natural gas could overcome oil’s dominant position, sometime over the next fifty years. Crude inventories are being burned off nearly twice as rapidly as gas. For example, according to Andy Flower, who consults for the LNG industry, the world’s shortage of Liquid Natural Gas (LNG) could continue through 2011 or longer. No major energy company planned activities to increase LNG production. That’s because costs to build LNG plants have tripled over the past six years, says Bechtel Group, the largest U.S. contractor.

Eventually, demand for gas and the subsequent soaring price will catch up on a global scale, in much the same way we now view crude oil with the recent higher lows. Imagine your reaction a decade ago if you read that traders were wondering if crude oil would again drop below $50/barrel? Natural gas might well emerge as a more widely followed commodity, as early as next month, should the weather forecasters have correctly predicted a vengeful winter.

Why Gas?

Natural gas has a lot going for it. As part of the push for cleaner air, lower CO2 emissions and to help reverse abrupt climate change, natural gas is often mentioned as a preferable alternative to coal-fired power plants. True, it lacks the excitement of nuclear energy and the subsequent momentum built into the uranium price. But, natural gas is no longer the cheap fuel it was five or ten years ago.

Demand for gas has gone up in the world’s most emerging economies. Countries such as China are championing gas as an integral part of their energy mix. And for good reason. Primarily, a coal-fueled economy China has severely suffered by not having depended upon gas to meet its growing economic needs. According to a September 2002 World Bank Policy Research Working Paper, air pollution from coal burning reportedly causes about 300,000 premature deaths every year. By the year in which this report was published, six of the world’s most polluted cities were in China.

In her highly acclaimed book, The River Runs Black (Cornell University Press, 2004), Elizabeth C. Economy wrote, “One positive environmental trend is the steady expansion of coal gas and natural gas for district heating in urban areas: since 1985, their use has increased more than five times.” The author praised China’s stronger attempts to fuel this country through hydroelectricity and natural gas.

The energy fuel North Americans believe suffers from excess capacity – and which according to Phil Flynn, those levels might be challenged with a wintry winter – China can not seem to obtain sufficient quantities to help ‘green’ its economy while maintaining double-digit economic growth. Previously, we wrote about China’s burgeoning demand for natural gas, for which it has signed on to own about 1.1 trillion cubic feet of Australian gas. The country can not appear to obtain sufficient foreign-produced gas and the shortage of LNG construction is likely to impact the country’s desire to increase gas consumption in its energy mix. The shortage of natural gas supply could reach between 30 and 40 billion cubic meters by 2010, according to one Chinese government estimate.

Isn’t it ironic that about $37 billion in natural gas is burned off every year because insufficient quantity can be transported through pipelines, or because excess gas is pumped underground to drive more crude oil to the surface, while a growing country such as China can not obtain sufficient gas to meet its energy needs? According to a January 15th Associated Press report, Beijing is trying to encourage its consumers to spend more and develop more ‘brand names.’ Along the same lines, that is what state-owned China United Coalbed Methane (CUCBM) has been doing over the past decade – offering what China has plenty of in return for piece of the eventual economic returns.