Oil, gas price gap remains

Sam Fletcher

The July natural gas contract price rebounded May 27 but failed to narrow the significant divergence between natural gas and crude prices that opened in the New York futures market as the expiring June contract fell in the three previous sessions.

Natural gas for July delivery gained 15.8¢ to $6.37/MMbtu in a shortened trading session May 27 on the New York Mercantile Exchange ahead of the 3-day US Memorial Day holiday. The July contract for benchmark US light, sweet crudes gained 84¢ to $51.85/bbl during that same session.

As crude futures prices climbed, the expiring June natural gas contract lost a total of 28.4¢ over three sessions to finish at to a new 3-month low of $6.12/MMbtu on May 26, almost 10% below the price level where it began as the near-month contract on NYMEX. On May 26, the US Energy Information Administration reported the injection of 93 bcf of natural gas into US underground storage during the week ended May 20, compared with injections of 90 bcf the previous week and 89 bcf during the same period a year ago. As of May 20, US gas storage totaled 1.69 tcf, up by 228 bcf from year-ago levels and 303 bcf above the 5-year average.

"Gas prices have been declining for the last 7-8 weeks as the gas surplus has stabilized in the neighborhood of 400-430 bcf vs. 10-year norms," said Stephen A. Smith, founder and president of Stephen Smith Energy Associates, Natchez, Miss. In a May 30 report, Smith projected a US natural gas storage surplus of 415 bcf for the week ended May 27.

He noted, "During much of the 1994-2003 period, there was spare gas production capacity that could be drawn during the coldest weeks to dampen the storage draw response to cold weather. But this is no longer the case since gas production now runs at capacity all year long. In addition, gas now supplies a larger share of winter power generation than it did 3-10 years ago. The net effect is that any specified degree of coldness, say a typical January week with 210 [heating degree days], will tend to result in a stronger storage draw today than it did in the past. We believe that this concern was also one of the principal reasons that January gas futures were as high as $8-9+[/MMbtu] in November 2004 (with gas storage in the range of roughly 300-400 bcf over historical fall storage norms)."

Crude stocks
The July crude contract price jumped to a 2-week high $50.98/bbl on May 25 when traders were surprised by a drawdown of commercial US crude inventories. Those stocks usually begin being drawn down earlier in May as demand ramps up for the US summer driving season that officially starts with the Memorial Day holiday.

EIA reported May 25 that commercial US crude inventories fell by 1.6 million bbl to 332.4 million bbl during the week ended May 20. "This is only the second decline in the last 15 weeks," said EIA (OGJ Online, May 25, 2005). Just a week earlier, US crude stocks had hit a 6-year high.

However, in the "key East Coast, Midwest, and Gulf Coast regions," US crude inventories fell by a cumulative 4.1 million bbl during the week ended May 20 "after 18 straight rises," said Paul Horsnell, Barclays Capital Inc., London, in a separate May 25 report. "We expect to see further draws in current weeks, with the base for a significant push up in crude prices continuing to form," he said.

EIA reported US gasoline inventories increased by 600,000 bbl to 215.4 million bbl in the week ended May 20, while distillate fuel stocks jumped by 1.9 million bbl to 105.7 million bbl, with most of that increase in heating oil.

US imports of crude fell by 548,000 b/d to 10.3 million b/d in that same period. Input of crude into US refineries increased by 319,000 b/d to more than 15.8 million b/d during the same time, with refineries operating at 94.6% of capacity.

"The other key feature of the US weekly [inventory data] is the strength of US demand despite the recent rash of demand pessimism," Horsnell said. "With¿record levels of US car travel expected, gasoline is looking strong. For May-to-date, gasoline demand is up [from a year ago] by a healthy 1.4% and has shown none of the degradation in growth that occurred through second quarter last year." He added, "Jet fuel demand is up [from a year ago] by 4.1%, and distillate demand is up by 4.6%."

(Online May 31, 2005; author's e-mail: samf@ogjonline.com)

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