Wall Street Journal
In a Cheap-Gas World, a Profit Patch

Thursday, September 10, 2009

By Ann Davis

Rock-bottom natural-gas prices aren't getting everyone down in the energy patch. Some participants are riding the downturn all the way to the bank.

Commodity traders and utilities have been stashing cheap gas in underground storage caverns during the past year. They have been locking in sales of the gas for future delivery at much higher prices on the futures markets or keeping costs low for electric power they produce in the future.

The opportunities in a cheap-gas world underscore how operators in the energy business have learned to adapt to a range of market conditions. Some companies are prospering even as natural-gas producers come to the conclusion their fuel may be far cheaper for the foreseeable future.

Thanks to huge natural-gas finds over the past year and weak demand in the recession, natural-gas prices have fallen to seven-year lows. Natural gas for October delivery on the New York Mercantile Exchange settled at $2.829 per million British thermal units Wednesday, up 2.2 cents, or 0.8%, and off 79% from its high last summer. By November, most energy observers are predicting gas-storage caverns around the U.S. will be full.

Crude-oil prices, meanwhile, aren't down nearly as much, leading to an unusual gap between oil and gas compared with past years. Nymex crude prices settled Wednesday at $71.31 a barrel, up 21 cents, or 0.3%, but down 51% from the closing record in July 2008.

Crude oil historically has cost anywhere from six to 12 times more per barrel than natural gas costs per million British thermal units, a measurement of energy. As of last Friday, Nymex crude closed at a price 37 times higher than a key gas spot-market contract, said Rusty Braziel, managing director of Bentek Energy, a natural-gas research firm in Evergreen, Colo.

"Nobody, but nobody, thought it was going to get this extreme," Mr. Braziel said.

Some natural-gas storage operators are minting money from the glut of fuel. The storage "merchants," whose rates aren't federally set, have been able to charge market rates for services since federal regulators relaxed control over gas-storage pricing in the 1990s.

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