While the price for natural gas has receded quickly from the post-hurricane highs of last summer, oil prices have been a different story.
Crude-oil future contracts on the New York Mercantile Exchange climbed about a dollar yesterday, settling at a four-month high of almost $67 a barrel. Benchmark light, sweet crude-oil futures for February rose $1.10 to settle at $66.83 a barrel, which was the highest closing price since mid-September. Although inventory data indicates that U.S. crude and product stocks are at above-average levels, market jitters remain over the possibility that international oil supplies could be disrupted further as a result of political problems in both Iran and Nigeria.
Clear Thinkers favorite James Hamilton is thinking about what the rise in oil prices indicates, and he continues to believe that the current oil price rise is demand-driven, unlike the speculative bubbles of past spikes.

Wasn’t it just a few weeks ago that we were enduring demagogues’ calls for governmental intervention in regard to increasing oil and gas prices?
Well, continuing a trend noted in this post from a week ago, the natural-gas contract for February delivery on the New York Mercantile Exchange settled at $9.499 per million British thermal units during intraday trading on the New York Mercantile Exchange, the first time that such contacts have settled below $10 since Hurricane Katrina wreaked havoc on Gulf Coast production facilities last summer. This represents almost a 40% decline from the Dec. 13 record. The market was undercut yesterday by an Energy Information Agency report that natural-gas volumes in U.S. storage actually rose last week, which is unprecedented during the last week of December.
Meanwhile, Clear Thinkers favorite James Hamilton is wondering whether the U.S. economy has faded the 2005 oil price shock and notes that there are some reasons to worry about energy prices in 2006.

Remember this post just two weeks ago about natural gas futures contracts settling at an all-time high price over $15 per million British thermal units?
Well, markets have a funny way of reacting to such pinnacles, and the market for natural gas futures has been in a free-fall almost ever since that earlier post. Yesterday, natural-gas futures for January contracts dropped 10% and pushed prices below $11 for the first time on the New York Mercantile Exchange since mid-September before settling at $11.022 per million British thermal units. Prices for January contracts have fallen 23% since Dec. 21 as thin trading and forecasts for mild weather are powerful forces driving the price of contracts downward. Some traders are now predicting that gas-futures prices will fall below $10 after the New Year if above-normal temperatures persist.

Clear Thinkers favorite Holman Jenkins‘s W$J/Business World column today provides a wonderful analysis of how domestic political demagoguery over Big Oil profits works to enhance fascist control of oil and gas supplies internationally. In so doing, Jenkins tosses the following delicious salvo at David Boies’ latest Big Oil lawsuit:

Consider the perfected idiocy of Sen. Maria Cantwell of Washington, who bought her Senate seat with a now-diminished dotcom fortune and has reason to worry about whether voters will find her worth re-electing. This undoubtedly explains her sudden and shrill emergence as the most unhinged of oil-industry bashers.
Last week she was quick to confuse the filing of a lawsuit with proof of guilt, denouncing BP and Exxon because they were named in an antitrust complaint by the deservedly obscure Alaska Gasline Port Authority. Ms. Cantwell was likely impressed by the name of David Boies, celebrity lawyer, as counsel for the plaintiffs. In fact, the AGPA consists of three Alaska municipalities whose plan for a gas liquefaction facility in the port of Valdez was recently rejected by the state as lacking any means of financing.

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For many years, the State of Alaska has been trying to persuade Exxon Mobil Corp. and BP PLC to invest with the state in a natural gas pipeline that would be built from the North Slope Oil Field to Valdez in the southern part of the state, where the companies’ natural gas would be liquefied and loaded onto tankers. But BP and Exxon Mobil prefer an alternative, longer pipeline over which they would own a larger share that would run through Canada to the Midwest. According to the companies, such a pipeline would deliver the natural gas directly to markets and be less risky than the state’s proposal. As a result of the disagreement between the state and the companies, there is currently little natural-gas production generated from the North Slope even though U.S. natural-gas prices are soaring.
So, what’s Alaska to do? Compromise and cut a deal with the owners of the natural gas? No way, not when the state can hire David Boies to come up with an implausible lawsuit against the companies (W$J article here) that plays on the public’s resentment of greedy capitalists.
Let’s see if we have Alaska’s lawsuit right. Exxon Mobil and BP, which generate less than 10% of the U.S. natural gas production, are refusing to enter into the pipeline deal that the state favors (and which might make the companies more money now, but maybe not) because the price of natural gas in the future will probably be higher than it is now. Thus, the companies prefer to “warehouse” their gas for the time being so that they can make more money in the future than they would make now.
That’s a lawsuit? Sounds as if Exxon Mobil and BP are making either a good or bad business decision to me (too early to say how it will turn out), but that should not be the basis of a lawsuit. Unless, that is, the purpose of the lawsuit is to punish those companies for having the right to make that decision in the first place.

Well, there has been almost a week’s worth of bets on the proposed ConocoPhillips – Burlington Resources merger, and those bets have been decidedly against ConocoPhillips.
Since Monday, ConocoPhillips shares have been hammered, closing yesterday at $58.77, which is down almost 7% since the proposed merger was announced. Moreover, Houston-based investment bank Sanders Morris Harris and A. G. Edwards both downgraded ConocoPhillips stock to a “hold” from their pre-merger announcement “buy” recommendation. As noted in this earlier post, the ConocoPhillips play for Burlington runs contrary to traditional big energy company policy toward such mergers during times of high energy prices.
Responding to this market skepticism, ConocoPhillips chairman and CEO James Mulva conceded yesterday in public comments that the company is paying “a full price” for Burlington, but that “access to quality long-term resources has become much more difficult and expensive. We are in an extremely competitive environment and a portfolio of assets of Burlington’s quality cannot be replicated.” Mr. Mulva also noted that ConocoPhillips is analyzing whether to use hedges to “either lock in prices or mitigate the potential downside of a reduction in gas prices.” Finally, Mr. Mulva predicted excess cash flow would allow ConocoPhillips to reduce the relatively high debt-to-capital ratio that it is taking on to make the deal to between 18% to 23% by the end of 2006.

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On the heels of this post from last week and ConocoPhillips’ big bet on natural gas earlier this week, natural gas futures jumped to another all-time high yesterday for a front-month contract and settled above $15 per million British thermal units for the first time. January futures on the New York Mercantile Exchange rose as high as $15.78 and settled at $15.378 per million British thermal units, which is an increase of about 38 cents from its previous settlement high.
Inasmuch as natural gas production in the Gulf of Mexico has still not recovered fully from the damage caused by multiple hurricanes earlier this year, natural gas supplies remain constricted. As a result, price is volatile on virtually any indication of increased demand, and the recent cold weather in the Upper Midwest and Northeast — the two main areas of hearing fuel demand — is seen as the primary cause of the increasing price of natural gas over the past week’s trading sessions. Following an unusually warm November in those regions, December has been bitterly cold as weather futures are betting that it will be at least 20% colder than normal in New York City and Chicago through the Christmas holiday.
Just the thought of that type of weather may force me to hit some golf balls at the driving range this afternoon in Houston’s beautiful late fall weather. ;^)

It was the coldest day of this winter season in Houston and much of rest of the U.S. yesterday, and the cold blast was met with a new record price for natural gas — January natural-gas futures hit an all-time high of $15.10 a million British thermal units on the New York Mercantile Exchange and then settled at a record high of $14.994 a million British thermal units.
Although damage to production facilities from the hurricanes earlier this year reduced available supplies of natural gas, the impetus for the current spike is cold weather. Although November was a relatively warm month, December is shaping up to be bitterly cold as weather futures on the Chicago Mercantile Exchange predict that December will be almost 25% colder than normal in Chicago and New York. What is even more remarkable is that the spike in natural gas prices isn’t bigger news than it is. Until the prior spike hike after hurricanes earlier this year, gas futures had rarely risen above the $10 a million BTU level and industry players thought a price of $15 was analogous to $100-a-barrel oil prices. Interesting how perceptions quickly change as people adjust to changing market conditions.

This earlier post noted that even the Washington Post editors now understand the folly of Congress considering a windfall profits tax against oil companies as a result of the price spikes that resulted from temporary supply disruptions. The last time that Congress imposed such a tax (late in the Carter Administration), domestic oil production actually decreased by about 5%, which resulted in higher gas prices, and U.S. reliance on foreign oil inceased by about 10%.
Reflecting that markets tend to take care of supply problems if Congress just stays out of the way, this Wall Street Journal ($)/Russell Gold article (free version here) notes that the recent surge in natural gas prices has prompted major exploration companies to make huge investments in recovery of natural gas from unconventional fields located in the contintental United States. The unconventional gas fields contain natural gas that is locked in giant swaths of coal, sandstone or shale from which extraction is expensive and difficult. However, the increase in natural gas prices, coupled with new technologies that crack open these rocks and extract large quantities of gas, is touching off an exploration boom in such fields throughout the Rocky Mountains and in Texas.
Meanwhile, not to be outdone by the fruits of such boring capitalism, the world’s favorite socialist of the moment — Venezuela’s Hugo Chavez — has hooked up with the Kennedy Family and other northeastern U.S. anti-capitalists to supply some oil to U.S. consumers in the northeast at 40% below current market prices. This Opinion Journal piece scours the political motives of Chavez’s “charity,” but there is an even simpler problem with this dubious arrangement — it does not make any sense for Chavez to sell oil at a 40% discount to people in the U.S. who are far richer than his constituents in Venezuela. Not exactly what I would call looking out for the interests of the little guy.

This earlier post noted the extensive damage that Hurricane Katrina caused to the MARS floating production platform in the Gulf of Mexico, which generates about 220,000 barrels of oil and 220 million cubic feet of natural gas daily when operational. Following up on that story, this Tom Fowler/Chronicle article reports on the delicate repair operation that will be taking place this week on the MARS platform. Essentially, the process involves removing a damaged rig from the platform, but the damaged rig is so ensnared with other equipment on the platform that removing it could cause even more damage to the equipment on the platform. Another story on the repair operation from the Baton Rouge Advocate is here. It’s this type of cost of doing business in the oil and gas industry that tends to get overlooked amidst the bright lights that shine on this grandstanding.