Traders Don’t Believe Washington Will Affect Gas-Price Futures—Not Yet

“We’ve seen a lot of bills wax and wane—no pun intended—a number of times over the years.” Waxman-Markey may go the way of the rest.

Traders aren’t factoring in futures prices any expectation of Washington legislating greater natural gas use. “If you were looking at only the natural gas market, no, you wouldn’t find it,” says Keith Barnett, director of strategic analysis for Merrill Lynch Global Commodities, in the webinar The Carbon Challenge: Impact On The Natural Gas Sector presented by Hart Energy Publishing LP.

If looking at futures for off-peak power in regions that have a lot of coal as part of it, traders are factoring in some belief that the Waxman-Markey bill will create some price fluctuation, he says.

Frankly, though, Barnett says of gas and other energy traders, “We’ve seen a lot of bills wax and wane—no pun intended—a number of times over the years.” Waxman-Markey may go the way of the rest.

As it stands now, Waxman-Markey should go the way of the rest—defeated—says Rod Lowman, president and CEO of America’s Natural Gas Alliance, which consists of 28 U.S. natural gas producers of more than 40% of daily supply. “We could not support Waxman-Markey as it stands now.” Within the 1,428-page document, little mention is made of natural gas.

Lowman says Congress is coming to understand that the U.S. has plentiful natural gas supply, both already surfaced and readily producible. “Shale and shale-gas plays have changed everything…This is going to be a global phenomenon—that we are going to have a lot of natural gas.”

What to do with all that gas? Some reports are that North American LNG receiving terminals may reverse flow to export LNG. Barnett says, “Yes, two Gulf Coast terminals (at Sabine Pass and Freeport) have DOE approval to export what was imported.” Two terminals in British Columbia may commence exporting LNG as well.

Jim Slutz, managing director of Global Energy Strategies LLC, notes that the U.S. already exports domestic gas production from Alaska (to Japan by DOE permission) and some southern U.S. production is exported, on a net basis, to Mexico.

Otherwise, North American gas supply is stranded, in a way.

Barnett says, “I have long thought that the ability to export LNG should not be inhibited by LDCs (local distribution companies). Exporting (U.S. gas) allows the market to balance itself and sends appropriate price signals, and we would be exporting to two of our strongest allies—the U.K. and Japan.”

The Merrill Lynch analysis team believes the Nymex gas price will struggle to exceed $4 for the balance of 2009, due to rapidly diminishing odds of many or any powerful Gulf of Mexico hurricanes this season, storage nearly full in the U.S. and Canada, and new LNG supply expected in the fourth quarter. “We’re obviously going to be in an oversupply situation in the back half of 2009,” Barnett says.

For 2010, the outlook is mixed. “The bulls are afraid of (a continued sluggish) economy and of more LNG imports and the bears are afraid of production declines.” Most economists expect slow U.S. growth in 2010, and a second wave of LNG imports is expected in the summer and fall, he adds.

Most forecasts among gas analysts across many firms expect prices to range from $2.50 to $8—generally between the cash cost and marginal plays’ life-cycle investment costs—during the next two to four years. Some forecasts are for $8 or nearly $8 in the latter half of 2010. “I’m less sanguine,” Barnett says. New LNG supply will keep Henry Hub gas prices well below $8.

For more of the presenters’ remarks, and for their slides, click for the webinar The Carbon Challenge: Impact On The Natural Gas Sector now available on demand. For information on The Carbon Challenge 11-part series of webinars, click to HartCarbon.com.