February 18, 2002; Futures May Help Smooth Natural Gas Price  

New York Mercantile Exchange quotes available for natural gas through February 2008 trace a rising trend.  We took the latest quotes and searched for a discount rate that would reduce 72 future months to an average present value equal to the first month (see Chart).

Thus, the futures market suggests that producers who leave their gas in the ground rather than sell now can earn 13% per year just for waiting, in addition to the normal producing profit.  The return is greater for short life producers, as in the Gulf of Mexico, who can makeup shut-in volumes sooner than for long life producers, as in the Rockies, who require more time to makeup shut-in volumes.  Skeptics could actually engage in a financial transaction to lock in that return, ignoring transaction costs.  Of course, trading volume is not high yet for far out months.  Also, as the experience with Enron suggests, the counter party may or may not be around to honor the transaction.   Nonetheless the implications are stronger than one person's opinion of where prices are headed.

The fact of an active futures market makes us less concerned about panic pricing near the end of the natural gas storage season over the next six weeks.  Producers should logically react to price pressure by shutting in small amounts of production temporarily, confident that those same volumes might be sold at higher prices over the coming years. If the likelihood of surprising near term weakness is diminished, then the promise of longer-term gain is more important to current investment decisions. 

  February 18, 2002; Meter Reader: Natural Gas Futures Payoff