Natural gas: Natural gas has missed out on the recent commodity rally. Despite oil’s rise, the price of natural gas in the US hit a seven-year low on August 18. Oil and gas may come from the same fields, but they’re not interchangeable. And a growing supply glut is causing the gas market a lot of indigestion.
The US price of oil has climbed 55 per cent this year so it is tempting to think that natural gas would follow. Instead, gas prices have nearly halved to just $3.096 per million British thermal units (Btu). That means a barrel of oil costs a record 22.3 times as much.
A barrel of oil generates six times the energy of one million Btu of gas. Historically, the price ratio has been around 10-to-1. The current disconnect is a stark reminder that they’re not perfect substitutes.
Oil can be easily transported and stored, whereas gas is more difficult to manage. There are also more uses for oil, while gas is primarily used as a fuel for power generation. With the economic downturn lowering consumer, industrial and other commercial demand for electricity, power generators do not need all the gas that is produced. The lack of hurricane-related disruption to US production and distribution infrastructure has also contributed to the glut.
Storage is close to capacity in some areas, meaning distributors’ demand will soon decline precipitously, forcing producers to turn off the taps. The plummeting gas price has had a number of unanticipated consequences. Coal-based power producer Energy Future Holdings, the Texas company formerly known as TXU which was taken private at the height of the LBO boom by a Kohlberg Kravis Roberts-led group, is one victim. The company has its electricity price pegged to the cost of natural gas by its regulators, and the once-lucrative spread between coal and gas prices has collapsed.
Other oddities have arisen. An exchange-traded fund that tracks natural gas futures contracts is trading at a 13 per cent premium to its net asset value because investors have ploughed money into it to bet on a gas price recovery.
They may be disappointed. Until Mother Nature weighs in, the economy recovers or suppliers voluntarily pull back, natural gas prices could fall more, even as oil marches on.