The Staton Jones Report

As I suspected, the forward month natural gas futures are moving upward -- all above $6/mmbtu now. And, given today's report of an unexpected drop in U.S. crude inventories, oil prices are headed back up into the mid-$36/bbl range.

It appears that refineries are gobbling up more oil now in an attempt to bring surging gasoline prices under control by increasing output to match demand. The demand for gasoline is rising, with U.S. inventories also declining. This is a little unsettling, since we haven't even reached peak gasoline demand months.

So, as increased refinery output is likely to slow the rise in gasoline prices a bit (perhaps not much; I also expect to see more calls for (a) reducing the diversion of oil into the strategic petroleum reserve, and (b) relaxation of EPA rules on gasoline formulations -- both a sign of desparation, and loaded with election-year implications), we will continue to see increased demand for crude in the coming months. As power generators and other industrial consumers feel the pinch of the subsequent price increases, those that can switch fuels, will, driving the demand for, and therefore price of, natural gas higher still.

To make the natural gas story a little more bleak for the U.S., increased oil prices has the effect of increasing proven reserves (for all nations), and Canada in particular will be keen to take advantage of this opportunity to develop their unconventional sources -- mainly, Alberta tar sands -- which will require a large increase in utilization of their domestic natural gas resources. That is likely to result in decreased willingness to export to the U.S. (watch for political battles over this issue in Canada), or at least a higher price for that gas to the U.S.

Again, pray for a mild summer.

Postscript: There's a fair bit of talk about liquified natural gas -- LNG, which allows natural gas to be transported overseas in tankers and stored in a compact form -- as a way to ameliorate domestic shortage problems. This article presents a pretty good view of the plans and challenges with LNG. Also, regarding natgas prices, some pretty good discussion about the relationship between commodity prices and natgas futures is presented here.