The Sweet Spot

Why Natural Gas Utilities Are in a Sweet Spot

What might be driving this performance? The answer seems to be the ability of the distribution chain to maintain its margins as the price of natural gas remains under pressure. The price pressure on natural gas is both relative and absolute; 12-month strip prices are 8.2% year-ago levels and an astonishing 66.2% below their levels of three years ago. Please remember this is for a 12-month strip of futures and thus averages out those periodic plunges lower in the front-month contract when supplies are high. On a relative basis, natural gas remains at a substantial discount to competing petroleum fuels. The city-gate price in Chicago is a mere 27.5% of the BTU-equivalent of 1% sulfur residual fuel oil. While we should not expect the two fuels to be at burner-tip parity for reasons discussed in January in Divergence of Crude Oil and Natural Gas Widens , the mere presence of the gap removes the final downward burst of price pressure between the pipeline and the final customer. In addition to the relative stock market performance and the price discount to competing fuels, we can see another piece of evidence pointing to high margins for the gas utilities, the relative performance of the Housing Fuels consumer price sub-index to the CPI Ex-Energy (would the government keep publishing these statistics if they knew they made my life easier?). Natural gas prices have been under substantial pressure for the better part of three years, and yet the home-heating CPI has been stronger than the CPI Ex-Energy. This is prima facie evidence once natural gas prices began their climb in 2004, the distribution chain could raise its prices and then retain the economic rent once prices fell. The notion that prices can be sticky on the way down is not particularly new, but it does lend credence to the notion that we are far less rational as economic actors than the textbooks proclaim. You get used to a price or a level and that becomes the psychological anchor against which you normalize things. Think of how high gold prices looked when they crossed north of the $400/500/600/700/800/900/1000/1100/1200/1300/1400/1500 level; if they were to retreat below any level $1,400 or less, it would look like a major downturn as we have grown accustomed otherwise. The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.