Sniffing a Nat Gas bottom? Nat gas drilling in U.S. declined sharply last week to 745 from the previous week's 777, lowest since Nov 2009. And here is another interesting perspective of a possible looming low for Dow Chemical
NEW YORK, Feb 3 (Reuters) - Dow Chemical Co <DOW.N>, one of the largest U.S. buyers of natural gas, is considering a hedging program for the first time in a decade to lock in rock-bottom prices for the fuel.
The move by Dow, the largest U.S. seller of chemicals, could signal growing concern in the nation's industrial sector that low gas prices will not last. Natural gas prices have fallen 50 percent in the last six months as output from vast U.S. shale fields flooded the market .
When asked if Dow is considering a hedging program to lock in low prices, Chief Executive Andrew Liveris said: "Yes."
"We used to do a lot of that in the late 1990s, early part of the last decade, and you can expect us to talk more about that in the future," Liveris said in an interview with Reuters.
The price Dow pays for ethane, a component of natural gas that is used to make many chemicals, rose as high as 94 cents per gallon in the fourth quarter. Prices have eased 30 cents so far in the first quarter, but executives are clearly worried about volatility.
Every 10-cent drop in the cost of ethane boosts earnings by $200 million, Liveris said.
Analysts have been closely watching Dow and its peers for signs they are locking in low costs. Indications in the natural gas futures and options markets show some players may be staking out positions.
On Friday, the natural gas futures contract <NGc1> was down slightly at $2.48 per million British thermal units (BTUs). Natural gas prices have dropped nearly 50 percent in the past three years.
"Companies are looking at these prices and locking in. Whenever you get near $2 (per million BTUs) you are going to have people locking in for the long term," said Phil Flynn, president of futures brokerage PFGBest Research in Chicago. "I would imagine that we will see a lot of hedging at these prices."
Natural gas prices likely will rise back to $4 to $6 per million BTUs by the end of the decade, Liveris said during a conference call with investors following his company's quarterly earnings report on Thursday. [see story]
High prices in the last decade, which peaked above $13 per million BTUs in 2005, made U.S. petrochemical and fertilizer manufacturers less competitive with their global counterparts, denting their market share.
The recent drop in price is largely due to the shale deposits in the United States. As a consequence of booming production, ConocoPhillips <COP.N>, Chesapeake Energy Corp <CHK.N> and other producers have said the low prices made production at some U.S. natural gas wells uneconomical.