Oil and gas producers may find themselves happy in tall cotton or struggling through tall weeds, based on how commodity prices trade, said Tim Statts, senior vice president for Kentucky-based Summit Energy, at a recent Houston Energy Finance Group breakfast. Summit, which has offices in Houston and internationally, helps commodity producers and end-users develop price-risk-management strategies and assess energy supply contracts and producer netbacks.

“A year ago at this time, natural gas was $10.90 on the Nymex. I don’t mean to make you weep, but that’s what it was. I think going forward, volatility is going to be worse,” he said. “We could be trading below $6 for a long time.”

For most producers, the right hedging strategy is the answer to revenue risk, but for consumers, hedging represents a way to manage cost risk.

“If a producer hedges and the market goes higher, he can lose out. If he doesn’t hedge and the market goes lower, he has to accept lower prices. For the consumer, the opposite is true. For them, energy is a cost so they tend to take heavier hedge positions—they don’t want high energy costs to blow them out of the water.”

Statts noted the recent surge in U.S. gas production from shales and the higher-than-usual storage numbers. “We have a lot of natural gas right now. You have produced and produced and produced. But some of these industrial plants that use gas are not coming back. That gas demand is gone and you will not see it again. The question is, by how much? Demand tends to move much more quickly than supply can respond.”

Statts said that if a lot of gas demand comes back when the economy recovers, it’s going to create a tight market due to the slowdown in gas drilling. Meanwhile, hedging is the answer. But, he said, most people focus on what hedge position to take, and whether to use puts, calls, collars or swaps. “You need to figure out what your real goal is. What are you trying to protect against? Are you in acquisition mode? Are you taking advantage of every peak?

“Everybody reacts when we hit a bottom and they all think, ‘It has to go up soon.’ But that’s not always true. At the end of the day, the market doesn’t care about your business. It does what it wants to do. The only thing you can control is your position in the market.”

—Leslie Haines