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Oil Jitters Can't Shake Up Natural Gas Prices

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Sooner or later, George P. Mitchell is going to be right. For years now, the chairman of Mitchell Energy & Development Corp. in Houston has been predicting an end to the natural-gas surplus. He won some vindication a year ago, when a record cold snap sent gas demand and prices soaring. This year, figuring that clean-air legislation would push gas into the limelight, Mitchell hiked his exploration spending 25%. Then came the Persian Gulf standoff, which has given customers who can burn either oil or gas further encouragement to shun oil.

But so far, Mitchell and other gas producers are in shock. Spot prices, which jumped to $2.10 per 1,000 cubic feet this fall, have crashed back to around $1.80--50~ below a year earlier. Gas in the industrial market is fetching the oil equivalent of only $15.70 a barrel--some $12 less than the residual oil that dual-fired customers often burn in its place. And supplies are so plentiful that any further jump in prices probably won't outlast the cold weather. That means the gas bubble--the term used to describe the gap between what could be produced and what is actually extracted--will linger. "The bubble's looking like a sausage," gripes Mitchell.

He may have his brethren in the industry to blame. Despite an unusually warm winter that cut demand early in 1990, many companies bet that the market would turn, and stepped up drilling. The American Gas Assn. says some 11,000 new wells were brought on line in 1990, up 17% from 1989's total of 9,400.

The potential from these wells is more than enough to handle the 330 billion cu. ft. in new annual demand created as industrial customers switched from oil to gas in the face of high crude prices. This month, U. S. producers will be able to churn out 58 billion cu. ft. a day--up from 56 billion last January, according to Petroleum Industry Research Associates in New York. Compare that with 1990 demand, which because of the warm first quarter fell below the 1989 level of 18.8 trillion cu. ft., and you get the widest difference between production capability and actual production since 1987 (chart). "The bubble will go on," says Benjamin Schlesinger, a natural gas consultant in Bethesda, Md.

Schlesinger sees first-quarter spot prices between $2.16 and $2.26 per 1,000 cu. ft. That's 5% to 10% above last year--but it's more than supply and demand would dictate. Schlesinger says that psychology--reflected in trading on the newly opened natural-gas futures market and in an overly strong rebound from summer lows of around $1.30--has added a 10~ to 15~ premium to gas.

A sluggish market makes sense to Bertram D. Moll, vice-president for gas supply at Consolidated Edison of New York Inc., which buys some 200 billion cu. ft. of gas a year. "There's just nothing on the horizon which would indicate, in any way, any problem with gas supply." Moll says prices in his area could reach $2.78 per 1,000 cu. ft. in January, versus $2.60 last year. But even for homes heated by natural gas, that won't mean more than a $3 to $4 rise in monthly bills over last season.

Until a few weeks ago, an alternative view held out hope for people like Mitchell. Some experts claimed the new wells, many of which are small producers, wouldn't be able to boost supplies as much as widely expected. In a good cold snap, it was said, prices could soar to $5. But the market is so depressed, says former price bull John E. Olson of First Boston Corp., "it's going to take a blue norther to get this going again."

PIPE DREAMS. Even then, it would have to stay awfully cold awfully long. Not only is production capacity up but so is storage volume. Energy Dept. figures show 7.3 trillion cu. ft. of gas in storage on Oct. 31, up from 6.9 trillion in 1987. In addition, Canada is shipping 1.4 trillion cu. ft. a year to the U. S., up 41% from 1987. And new pipelines in the Midwest and Northeast enable suppliers to better cover any shortages that pop up.

Odds are, then, that instead of bursting, as has been forecast for years, the bubble will gradually shrink. Drawn to oil by today's high prices, only 40% of the 1,151 U. S. drilling rigs are now looking for gas, down from 50% in July, reports Houston oil-field service company Baker Hughes Inc. That could rein in future supplies. Then, too, homeowners, utilities, and industry should keep moving to gas, pushing up demand. But the switch will take a lot of capital investment and time. Which suggests that while George Mitchell will one day be right, he will have to be patient.Mark Ivey in Houston, with Robert Buderi in New York

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