The heat wave gripping parts of Canada and the United States may have natural gas prices skyrocketing, but some analysts are warning that gas stocks could burn investors looking for a quick profit.
"I would say that if you are a trader, you should trade them," said Alan Laws, an analyst at Merrill Lynch & Co. "But I would be careful about buying them now."
Natural gas prices have had a remarkable week, recording their biggest one-day gain this year on Monday as people across the northeastern U.S. and Ontario cranked up their air conditioners to cope with searing hot temperatures.
Concern that a tropical storm called Chris will disrupt production in the Gulf of Mexico, the way hurricanes Katrina and Rita did last year, is also fuelling gas's rise.
Natural gas futures for September delivery gained 22.5 cents (U.S.) or 3 per cent to $7.80 for 1,000 cubic feet on the New York Mercantile Exchange yesterday. The commodity has rallied 8.6 per cent this week, rising as high as $8.545.
The price of natural gas, often overlooked in the shadow of crude oil, has surged 40 per cent in the past two weeks after dropping in the first six months of 2006 as high inventory levels spurred by mild weather lowered demand.
Kyle Cooper, director of research at IAF Advisors in Houston, said the direction of the latest tropical storm and the duration of the heat wave will dictate where prices go in the next few weeks.
"If on Monday that storm is heading down the path Katrina took, we could be up another buck," he said. "If it has turned, or dissipated, then we will be down a buck."
Over the next few months, Mr. Cooper predicts natural gas prices will drop below $7, although he would not rule out a jump to around $9.50 first.
He said last week's U.S. natural gas storage data, which revealed an unexpected withdrawal, was an anomaly. The natural gas season heating kicks off in November, and the period between April and October is normally a period when stockpiles grow.
With no supply issues at hand, Mr. Cooper's advice is to steer clear of natural-gas-related stocks, a volatile sector that will likely drop alongside prices.
Other analysts aren't so sure.
Martin King of brokerage FirstEnergy Capital Corp. in Calgary said the natural gas market is at a crossroads.
"If the tropical storm fizzles out and it becomes very cold, a profit-taking rally is all but certain to take hold of this market," he said. "My view is that we hit the lows for prices three weeks ago."
Last Thursday's natural gas inventory report -- which showed a first-ever withdrawal in the week ended July 21 -- has raised the notion of tighter demand, despite healthy storage levels.
"Certainly the wildly bloated storage levels that have been bandied about by people until the last two weeks are fading away," Mr. King said.
He predicts the U.S. Energy Department will say supplies last week rose 13 billion cubic feet when it releases data this morning.
Mr. Laws at Merrill Lynch said the erosion of the natural gas stockpile overhang would raise questions about the slowdown in corporate activity he is forecasting in the second half of the year. Nevertheless, he expects that slowing growth in North America and an acceleration in international oil-driven markets will eventually lead to lower natural gas prices and "significant pullback" for stocks.
His top picks -- Transocean Inc., Schlumberger Ltd., Baker-Hughes, and Diamond Offshore Drilling -- have high oil and international exposure.
EnCana Corp., Canadian Natural Resources Ltd., and Talisman Energy Inc. are the biggest Canadian companies with significant exposure to natural gas.
"I would say that if you are a trader, you should trade them," said Alan Laws, an analyst at Merrill Lynch & Co. "But I would be careful about buying them now."
Natural gas prices have had a remarkable week, recording their biggest one-day gain this year on Monday as people across the northeastern U.S. and Ontario cranked up their air conditioners to cope with searing hot temperatures.
Concern that a tropical storm called Chris will disrupt production in the Gulf of Mexico, the way hurricanes Katrina and Rita did last year, is also fuelling gas's rise.
Natural gas futures for September delivery gained 22.5 cents (U.S.) or 3 per cent to $7.80 for 1,000 cubic feet on the New York Mercantile Exchange yesterday. The commodity has rallied 8.6 per cent this week, rising as high as $8.545.
The price of natural gas, often overlooked in the shadow of crude oil, has surged 40 per cent in the past two weeks after dropping in the first six months of 2006 as high inventory levels spurred by mild weather lowered demand.
Kyle Cooper, director of research at IAF Advisors in Houston, said the direction of the latest tropical storm and the duration of the heat wave will dictate where prices go in the next few weeks.
"If on Monday that storm is heading down the path Katrina took, we could be up another buck," he said. "If it has turned, or dissipated, then we will be down a buck."
Over the next few months, Mr. Cooper predicts natural gas prices will drop below $7, although he would not rule out a jump to around $9.50 first.
He said last week's U.S. natural gas storage data, which revealed an unexpected withdrawal, was an anomaly. The natural gas season heating kicks off in November, and the period between April and October is normally a period when stockpiles grow.
With no supply issues at hand, Mr. Cooper's advice is to steer clear of natural-gas-related stocks, a volatile sector that will likely drop alongside prices.
Other analysts aren't so sure.
Martin King of brokerage FirstEnergy Capital Corp. in Calgary said the natural gas market is at a crossroads.
"If the tropical storm fizzles out and it becomes very cold, a profit-taking rally is all but certain to take hold of this market," he said. "My view is that we hit the lows for prices three weeks ago."
Last Thursday's natural gas inventory report -- which showed a first-ever withdrawal in the week ended July 21 -- has raised the notion of tighter demand, despite healthy storage levels.
"Certainly the wildly bloated storage levels that have been bandied about by people until the last two weeks are fading away," Mr. King said.
He predicts the U.S. Energy Department will say supplies last week rose 13 billion cubic feet when it releases data this morning.
Mr. Laws at Merrill Lynch said the erosion of the natural gas stockpile overhang would raise questions about the slowdown in corporate activity he is forecasting in the second half of the year. Nevertheless, he expects that slowing growth in North America and an acceleration in international oil-driven markets will eventually lead to lower natural gas prices and "significant pullback" for stocks.
His top picks -- Transocean Inc., Schlumberger Ltd., Baker-Hughes, and Diamond Offshore Drilling -- have high oil and international exposure.
EnCana Corp., Canadian Natural Resources Ltd., and Talisman Energy Inc. are the biggest Canadian companies with significant exposure to natural gas.
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