Market watch: Natural gas passes $9/Mcf , heating oil hits record high on NYMEX

Sam Fletcher
Senior Writer

HOUSTON, Feb 25 -- Propelled by icy weather in the Midwest and Northeast US, the March natural gas contract slid past $9/Mcf to a 25-month high, while heating oil for the same month set a record high Monday on the New York Mercantile Exchange.

The natural gas contract peaked at $9.20/Mcf before closing at $9.14/Mcf, up $2.53, or 38%, for the day.

Heating oil hit an all-time high of $1.1535/gal Monday on NYMEX, surpassing the previous record of $1.15/gal in November 1979, before also retreating. It closed at $1.1467/gal, up 3.82¢ for the day.

"The (NYMEX natural gas) market opened way up at $8(/Mcf) but dipped back below $7.50(/Mcf) early (Monday) before turning back around and heading sharply higher for the rest of the day. The combined effects of cold weather, dwindling supplies, and lagging drilling programs have driven storage inventories 43% below a year ago," analysts at Enerfax Daily reported Tuesday.

On the cash spot market, they said, "Natural gas for next day delivery across the US and Canada was generally $5-10(/Mcf) higher yesterday. Natural gas for next day delivery at the Henry hub soared $5.75 to $12.50(/Mcf)."

Unusually cold weather has raised natural gas futures prices by 40% and heating oil prices by 22% in February, said other industry analysts.

Expiring contracts
Price volatility usually associated with contract expirations also added to Monday's fly-up, said John P. Herrlin Jr., first vice-president of the Merrill Lynch Global Securities Research & Economics Group. Those NYMEX contracts are scheduled to terminate trading Wednesday.

Herrlin reported Tuesday, "We believe the cold weather caused a price increase, in addition to short covering, which created a very unusual 1-day price movement in the near-month contract."

He said, "$9+/Mcf gas in February is not healthy for the demand side of the equation, but given the consistent above-average withdrawals (of natural gas from US underground storage) experienced over each of the last 6 weeks and the return of cold weather to the Northeast, many (traders) are now speculating on (seasonal) ending levels for storage."

"We think refill (of US gas storage) during the summer months may become an issue, but the persistence of truly silly prices will cause some type of elastic reaction," Herrlin said. He noted that spot gas prices hit $22/Mcf in the Northeast and $12/Mcf in the US Gulf Coast region Monday.

"A colder weather forecast for much of the US caught many (gas futures market) participants in a short squeeze, as many had no choice but to continue buying," agreed James K. Wicklund and other analysts at Banc of America Securities LLC in Houston.

"Although any demand destruction caused by higher prices can help offset the problem at hand, we believe the supply shortfall will more than offset any demand loss," Wicklund said.

Enerfax Daily analysts said that rebuilding potentially record-low US gas storage "will be far more difficult because the amount of new gas drilled in the US continues to dwindle as old fields yield less gas and demand rises as the economy recovers."

"Natural gas demand is expected to rise about 5% in 2003 after being flat in 2002, and US production is expected to fall about 2% after dipping 3% last year. Added to declining domestic production, Canadian imports fell for the first time since 1986 last year. Also, Canadian imports are expected to dip again this year by as much as 3% as it struggles to meet its own rising demand," Enerfax analysts said.

Other futures prices
The April contract for benchmark US sweet, light crudes jumped by 90¢ to $36.48/bbl Monday on NYMEX, while the May position advanced by 71¢ to $35.04/bbl. Unleaded gasoline for March delivery shot up 3.47¢ to $1.05/gal.

Meanwhile, US Energy Secretary Spencer Abraham said Tuesday that, if necessary, the US government is prepared to quickly release emergency oil reserves from the Strategic Petroleum Reserves to offset any disruption of Middle East oil supplies resulting from a war with Iraq.

At an informal meeting with energy ministers from the European Union in Thessaloniki, Greece, Alvaro Silva Calderon, secretary general of the Organization of Petroleum Exporting Countries, reaffirmed that group's determination to ensure secure oil supplies to international markets.

In London, reports that UK and US officials are ready to file a new resolution on Iraq with the United Nations Security Council spurred strong buying of oil futures on the International Petroleum Exchange. The IPE market is being driven by a perception that diplomatic efforts have almost been exhausted and that war is now close, brokers said.

The April contract for North Sea Brent escalated by 88¢ to $33.15/bbl Monday. However, brokers said there is still room for substantial rises; a surge to a high of $40/bbl, seen at the start of the 1990 conflict between Iraq and Kuwait, would be possible if Iraq is attacked by US-led forces, they said.

The March natural gas contract lost 2.8¢ to the equivalent of $2.70/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes gained 60¢ to $32.44/bbl Monday.

Contact Sam Fletcher at samf@ogjonline.com

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