Copyright 2000 The Houston Chronicle Publishing Company
The Houston Chronicle
December 08, 2000, Friday 3 STAR EDITION
SECTION: BUSINESS; Pg. 1
LENGTH: 977 words
HEADLINE:
Gas prices volatile under pressure;
Futures fall after
reaching new high overnight
SOURCE: Staff
BYLINE: DAVID IVANOVICH, Houston Chronicle Washington
Bureau
DATELINE: WASHINGTON
BODY:
WASHINGTON - Natural gas
prices soared to breath-taking heights, only to then drop out of the
sky Thursday as traders tried to assess the effects of continued supply problems
against the first major cold snap of the year.
And industry analysts
warned this week's combination of high prices and extreme volatility could
continue through the winter, as gas producers struggle to keep up with
rising demand.
Gas futures for delivery in January fell
11.2 cents to close at $ 8.373 per thousand cubic feet on the New York
Mercantile Exchange, after smashing all previous exchange records to hit a high
of $ 9.539 per thousand cubic feet in overnight trading, the highest since
natural gas began trading on the Merc 10 years ago.
Trading was halted
for an hour Thursday morning after gas prices plunged at such a
dizzying rate the exchange's automatic curbs kicked in. Despite the 12 percent
drop from after-hours trading, Thursday's closing price was still the
second-highest close on record, after Wednesday.
A year ago, natural gas
was trading in the $ 2.20 range.
Many industry watchers had predicted
that the Arctic blast that brought frigid temperatures to much of the Midwest
and Northeast would prompt a price breakout in the gas market.
"This is
like a breakout on drugs," noted one analyst, who asked not to be named.
The market's stomach-losing ride Thursday came after the American Gas
Association reported late Wednesday that gas inventories had dipped to 2.43
trillion cubic feet by the end of last week, down nearly 3 percent from the
previous week and off 17 percent from the same time a year ago.
While
sizable, last week's stock drawdown was not as dramatic as many analysts had
feared.
But with weather forecasters anticipating the coldest winter in
a few years and gas inventories already at low levels, many analysts worry
stocks could reach perilously low levels by spring.
As a result, the
U.S. Energy Information Administration already has warned residential customers
to expect substantially higher home heating bills this winter.
Houston
consumers already are feeling the pinch.
In August, Reliant Energy Entex
won approval of a fuel adjustment that will raise the typical Houston gas
customer's monthly bill to $ 60.22, up from $ 43.08. Another price increase is
possible in February.
Gas prices also affect electricity prices because
an increasing number of electric power generators use gas to fire their plants.
The average Reliant Energy HL&P customer can expect to pay $ 179 a month for
electricity this winter, up from $ 139 last year.
Gas supplies are tight
because, despite drilling at full tilt, producers have not been able to keep up
a demand propelled by a still relatively strong U.S. economy and rising
electricity demand.
Cleaner-burning gas has become the fuel of choice
for virtually all new electric power generation coming on stream.
Indeed, over the next five years, power generation is expected to
overtake residential and commercial heating as the primary customer for natural
gas, according to Bill Hyler, an analyst at CIBC World Markets in New York.
What that means is the natural gas industry, which once enjoyed only one
peak-demand season each year - the winter heating months - now must cope with a
second demand season - the summer air conditioning months.
By 2010, U.S.
gas demand is likely to top 28 trillion cubic feet, compared with 21.4 trillion
cubic feet last year.
During the first nine months of the year, U.S. gas
demand was up only about 2 to 2.5 percent over last year, although use among
power generators is up 7 percent, Hyler noted.
While the gas industry
has been gaining new customers in recent years, the would-be increase in demand
has been largely offset by three extremely warm winters, analysts said. Now that
temperatures in much of the nation are running below normal, the new demand has
become more readily apparent.
"The industry got a little complacent,
given that we had such mild winters," said James Yannello, senior natural gas
analyst with UBS Warburg in New York. "I think it's as simple as that. People
were not considering all the variables in the equation."
Oil and gas
producers, who were clobbered a couple of years ago when energy prices
collapsed, were leery of cranking production too quickly when commodity prices
began to recover.
"Sometimes you over-correct, and yes we
over-corrected," said Thomas Driscoll, an analyst with Lehman Bros. in New York.
But this year, first oil and then natural gas prices have jumped to
10-year highs, and confidence in the Oil Patch has grown steadily.
Usually, producers can find reason to be optimistic about one of their
commodity prices, oil or gas, but not both, said Craig Clark, executive vice
president of U.S. operations at Houston-based Apache Corp.
"It's been a
fun time," he said.
That confidence can be seen in the increased
drilling activity.
The total number of drilling rigs operating in the
United States last week was 1,090, up from 796 a year ago, according to
Houston-based Baker Hughes.
In November, 832 rigs were drilling for gas,
up from 677 in June and 635 the previous year.
"So the industry's
working" Yannello said.
Gas production, however, is still off about 7
percent from 1997's predownturn levels, Driscoll said.
Because of those
still-tight supplies and ever-increasing demand, many analysts expect gas prices
to remain strong throughout the winter, although probably not at the kind of
levels witnessed this week.
"This can drop on a dime," Yannello warned.
"No one expected it this high. If the weather turns negative, you drop just as
fast."
Winter heating costs
October-to-March bills for a typical Midwest household heated
with natural gas:
1997-98 $ 541
1998-99 $
530
1999-00 $ 540
2000-01 $ 834*
*
Forecast
GRAPHIC: Graph: Winter heating costs
(color, TEXT); Houston Chronicle, Source: Energy Information Administration,
Reuters
TYPE: -LINKS-
LOAD-DATE: December 9, 2000 
