MARKET WATCH
Energy futures prices fall; natural gas at 7-month low

Sam Fletcher
Senior Writer

HOUSTON, July 23 -- The natural gas futures price hit a 7-month low Tuesday on the New York Mercantile Exchange as a tropical storm dissipated in the Caribbean. Oil futures prices also plummeted in the New York and London markets, but no one seemed to know exactly why.

In an opinion piece published Wednesday in the Wall Street Journal, F.J. Bing West, a former US assistant secretary of defense, connected the sharp fall of oil prices with the deaths of Uday and Qusay Hussein, killed Tuesday in a firefight with US troops in Iraq. "The market immediately reacted by dropping the price of oil," he said.

Stephen A. Smith, founder and president of Stephen Smith Energy Associates, Natchez, Miss., told OGJ there was speculation among traders Tuesday that looting and other resistance to coalition forces in Iraq "may be starting to slow." That speculation may have been triggered by the deaths of the two sons of former Iraqi strongman Saddam Hussein.

Uday Hussein, Saddam's oldest son, headed the Saddam fedayeen, a loyalist paramilitary force. Qusay Hussein was a deputy of the Baath party's military bureau. Remnants of the two groups are suspected of attacks on coalition forces in Iraq since the end of the war. Elimination of two leaders of the resistance might move Iraq closer to pacification and resumption of its oil production and exports, Smith said.

"Natural gas prices came down with oil prices. The problem is, I'm not sure why oil prices came down," said J. Marshall Adkins, an analyst in the Houston office of Raymond James & Associates, St. Petersburg, Fla., who reported Wednesday a continued "fairly bullish outlook" for both oil and gas, based on market fundamentals. Elimination of the Hussein brothers "could have been something of a factor" in Tuesday's market, he said, "but who can say how much?"

NewsEdge Corp. in an online report quoted Agence France Presse as saying oil prices fell after the London-based Centre for Global Energy Studies (CGES) urged members of the Organization of Petroleum Exporting Countries to increase production at their meeting next week to halt rising prices in "world markets still deprived of Iraqi oil."

Other sources attributed the sharp drop in oil futures prices to the expiration Tuesday of the August crude contract on the New York Mercantile Exchange. Reports said most of that sell off occurred in the last hour of the NYMEX trading session.


NYMEX prices
The August contract for benchmark US light, sweet crudes fell by $1.59 to $30.19/bbl Tuesday on NYMEX, while the September position lost $1.34 to $29.49/bbl. Unleaded gasoline for August delivery plunged by 4.35¢ to 88.83¢/gal, wiping out gains from the last three trading sessions. Heating oil for the same month dropped 3.94¢ to 75.64¢/gal.

The August natural gas contract plunged by 23.9¢ to $4.87/Mcf Tuesday. "The market opened down and continued to drop lower until mid-afternoon, when it bounced off the daily low of $4.84(/Mcf) three times in late afternoon trading," analysts at Enerfax Daily reported Wednesday. "The demise of Tropical Depression 6 set off a wave of early selling and set things up to likely head lower today with moderate weather forecasts and a sinking crude oil market pressuring the entire energy complex."

They said, "Technical traders said (Tuesday's) close below the $5(/Mcf) level is a bearish sign and could set the stage for another leg lower."

Natural gas outlook
"The market is paying the price now for $6.50(/Mcf) gas," Smith said. The market earlier spent "5-6 weeks with gas prices over $6(/Mcf)," followed by "a number of weeks over $5(/Mcf). That destroyed a lot of demand," he said.

That in turn freed up enough gas for the recent major build up of US underground gas storage, with injections exceeding 100 bcf during several weeks, including a record injection of 127 bcf of gas during the week ended June 20. At last report, US natural gas storage totaled 1.87 tcf, which is 556 bcf less than year-ago levels and down 300 bcf from the 5-year average.

However, Smith said, "In about 6 weeks, with no major changes (in weather or gas supplies), we'll be back to more normal inventory levels and will start building a surplus" for the coming winter heating season.

Adkins sees natural gas prices now at such a low level that more customers with dual-fuel capacity are starting to switch back to natural gas from alternative fuel oil, although it will take awhile to regain fully those lost markets. Meanwhile, he said, "A couple of weeks of warm weather will shock the market again," pushing natural gas prices higher.

"I think the (price) equilibrium (of natural gas supplies and demand) is above $5(/Mcf), closer to $6(/Mcf)," he told OGJ Online.

Other markets
In London, the September contract for North Sea Brent oil fell by $1.20 to $27.49/bbl Tuesday on the International Petroleum Exchange. The August natural gas contract dipped by 0.65¢ to the equivalent of $2.70/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 81¢ to $27.17/bbl Tuesday.

Contact Sam Fletcher at samf@ogjonline.com

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