Craving for commodities pushes oil over $110/barrel

Natural gas prices are up nearly 30 percent this year.

WASHINGTON (AP) — There is little overlap in the ways consumers use crude-oil and natural gas. Investors are another matter.

Oil futures’ recent surge above $110 a barrel in large part reflects investors’ scramble for protection against the falling dollar and stock markets. This craving for commodities is also leading more players on Wall Street to natural gas markets, where prices are up nearly 30 percent since the start of the year.

With supply and demand in balance, natural gas prices, which are at their highest level since Hurricane Katrina knocked out key production facilities along the Gulf Coast, “seem to be moving more on outside factors,” said Tom Bentz, senior energy analyst at BNP Paribas Commodity Futures in New York.

On Friday afternoon, natural gas futures fell 15 cents to trade at $10.08 per 1,000 cubic feet on the New York Mercantile Exchange, an increase of more than 42 percent from last year.

The run-up is a boon to natural-gas producers such as Anadarko Petroleum Corp. and Devon Energy Corp., but it’s also forcing many of the nation’s households to dig deeper to heat their homes and costing manufacturers more to run their plants.

Higher prices also are driving up costs for fertilizer, plastics and a wide range of chemicals derived from natural gas. Transportation costs are up, too, due to soaring prices for gasoline, diesel and jet fuel refined from crude.

While the Midwest and other parts of the U.S. have been hit by cold spells, utilities’ inventories of this mostly domestic fuel remain abundant. Current supplies are about 4 percent above the five-year average for this time of year, according to government data.

But demand is growing. U.S. natural-gas consumption grew 6.4 percent in 2007, and is expected to increase more modestly this year, the Energy Department forecasts.

To be sure, a harsh winter requiring near-record withdrawals of natural gas from underground storage has played a part in the recent price spike. But what’s really driving the flow of money into natural gas, and driving up the price, are an increasing number of “momentum players” flocking to energy commodities in general amid uncertainty in the stock market, said Larry Chorn, chief economist at Platts, the energy research arm of McGraw-Hill Cos.

Average daily trading volume on Nymex in 2007 was nearly 29 percent higher than the year before, according to the Commodity Futures Trading Commission. And the average volume during the first two months of 2008 was 29 percent higher than the 2007 full-year average.

The most recent jump in natural gas prices is expected to hold for a variety of reasons, including falling imports from Canada and growing demand from the power sector, said Calyon Securities analyst Carin Dehne Kiley.

“These factors, combined with strong crude oil prices, should provide support for natural gas,” Kiley wrote this week in a research note.

Some experts say natural gas futures could head even higher, riding on the coattails of oil’s ascent.

Natural gas futures typically were valued at about one-sixth the cost of oil futures during the previous two decades, said Skip Horvath, president and chief executive of the Natural Gas Supply Association. That ratio fluctuates, but based on where oil’s now trading “it appears that gas is undervalued,” Horvath said.

“There’s a very high likelihood that, over time, we’ll see gas catch up,” said Andy Weissman, publisher of the weekly Energy Business Watch. It could take several years before there is a return to the historical price relationship between oil and natural gas, he added.

The Energy Department this week said it expects natural gas prices to average $8.18 per 1,000 cubic feet this year, an increase of 14 percent compared with the 2007 average.

Milder weather on the horizon here and in Europe could help ease the pressure on natural gas prices, analysts said, though it may not be enough to halt the demand on Wall Street for energy commodities, said Vince White, Devon’s vice president of communications and investor relations.