Analyst at Jefferies discusses the outlook for natural gas and the impact on exploration & production companies.
Subash Chandra is managing director for Jefferies Group, covering the oil & gas exploration & production sector. He has more than 15 years of sell-side experience as a senior energy analyst. HAI’s Sumit Roy recently caught up with Chandra in Jefferies’ New York offices to discuss the outlook for natural gas.
HardAssetsInvestor: Though it’s been up and down recently, earlier this year all the talk was about plunging natural gas prices. In fact, they hit the lowest level in over a decade—below $2 at one point. Can you explain what caused that massive decline?
Subash Chandra: We had a major inventory overhang from a warm winter and we had very aggressive supply growth. We were building inventories at a very dramatic clip and that caused prices to plunge.
HAI: Following that decade low earlier this year, we saw prices rebound. Recently tit’s traded at more than $3. What was the catalyst for that rebound, and can it continue?
Chandra: The catalyst for the rebound was record-setting temperatures. We had periods this summer when the weather was 30 to 40 percent hotter than normal. What we always see is gas prices will plunge in the shoulder season [spring] and then recover in the summer peaking season. Thus it’s very important to have a view on average natural gas prices; otherwise, you end up selling when everyone else is selling, and you end up buying when everyone else is buying, and you never make any money.
Understanding what part of these price moves is weather driven, what part of it is structural, is really the trick. That move to $3.20 or so was based on extremely hot weather, and the outlook for extremely hot weather. What folks should have recognized is that move was based on a continuation of extremely hot weather. Instead, weather moderated. It’s still warmer than normal, but rather than being 30 or 40 percent warmer than normal, it’s more like 10 percent warmer than normal. And as a result, the commodity has collapsed here recently by about 40 or 50 cents.
HAI: So I assume you see the rally as having topped out for now at least?
Chandra: Yes. Power demand should begin to seasonally decline in the next week or two. Without rising power demand, it’s very hard to sustain a rally. The seasonal power demand peak is around now—within the next week or so. Unless we get record-breaking temperatures in the third quarter—which the forecasts don’t call for—or you get a massive hurricane outage, you’ll have continued stress on the commodity.
HAI: What’s the situation with coal as it relates to gas? Apparently we’re seeing a lot of coal-to-gas switching, but at some point won’t they switch back if prices are too high?
Chandra: We speculated that PRB [Powder River Basin coal] would switch back over $3. Our feeling was that gas would be range-bound between $2 and $3, and that’s what ended up happening. I think there’s additional coal displacement if gas drops below $2, so I don’t think we’re going to see sub-$2 any more in natural gas. We’ll just be in this range of $2 to $3 for a while.
