Gas futures prices hit record highs

Sam Fletcher
Senior Writer

Natural gas futures prices hit record highs Dec. 8 in the New York market as a storm that dumped as much as 10 in. of snow on Midwest plains threatened the northeastern US.

In northern Texas, temperatures plunged to record lows, and ice covered streets and highways. Although no disruptions were reported, an extended major freeze in Texas in the early 1990s shut in gas production in several key counties and curtailed transportation of LPG and heating oil to northern markets.

The January natural gas contract shot up by $1.29 to a record high closing of $14.99/MMbtu Dec. 8 on the New York Mercantile Exchange. It then hit an all-time high of $15.52/MMbtu in overnight electronic trading. The January contract for benchmark US light, sweet crudes jumped by $1.45 to $60.66/bbl on NYMEX, wiping out losses from the previous session.

But in the next session, energy prices fell in profit-taking ahead of the weekend. The January gas contract dropped 68.2¢ to $14.31/MMbtu on NYMEX. "Even with the major correction, prices were up 2.7% last week and have more than doubled in the past year," said analysts at Enerfax Daily. January benchmark crudes lost $1.27 to $59.39/bbl.

Untreated gas
Meanwhile, with billions of cubic feet of gas processing capacity shut in by hurricane damage, large amounts of gas coming online were being delivered untreated at city gates. "Although three plants, totaling 1.35 bcfd of processing capacity, have recently been restored, and another plant with 1.3 bcfd of capacity is expected to come back online in January, a sizable amount of unprocessed gas still does not have access to these facilities yet continues to pour into the distribution system," said Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York.

He warned, "Dew points occur in the pipeline system when unprocessed or 'hot' gas (high in btu content) condenses at low temperatures." The phenomenon can damage pipeline seals, Barone said, "creating a safety hazard whose effect can be as mild as higher maintenance costs for pipeline operators and as severe as explosions in the pipelines themselves."

He said, "Falling temperatures, however, could invariably result in tighter adherence to pipeline standards and curtail the amount of unprocessed gas flowing out of the gulf at a time when it is in highest demand."

No action taken
As expected, ministers of the Organization of Petroleum Exporting Countries took no action at their meeting Dec. 12 in Kuwait City but agreed to meet again Jan. 31 in Vienna to review the market outlook for the second and third quarters of 2006, when demand is expected to be seasonally lower. That means no change at this time in the official production ceiling of 28 million b/d adopted in June for the 10 OPEC members aside from Iraq, which is trying to bring its production back to prewar levels.

"OPEC's spare capacity will reach the comfortable level of around 2.5 million b/d by the end of this year, and we expect to add another million barrels per day of capacity in 2006," said Ahmad Fahad Al-Ahmad Al-Sabah, conference president of the cartel and energy minister for Kuwait, at that meeting. "Much of this will come in the form of light and medium crudes, which are heavily in demand. OPEC is ready to bring this capacity on stream at short notice, should the market require it."

However, he warned, "The products market remains under pressure from the downstream bottlenecks with which we have now become familiar, especially in major consuming regions." He said, "We feel that consuming countries should pay more attention to relieving the constraints in the refining industry."

Analysts at Friedman, Billings, Ramsey & Co. Inc. said, "Although hurricanes, production downtime, and delays have resulted in a minimal increase to non-OPEC supply growth in 2005 (only 200,000 b/d vs. the 10-year average of 1 million b/d), slowing demand and a high level of output from OPEC has resulted in a 133 million bbl (3.3%) increase to global crude oil and refined product inventories this year."

On Dec. 12, the US Minerals Management Service listed as still evacuated 126, or 15.4%, of the manned platforms in the Gulf of Mexico. It reported 441,394 b/d of crude and 2.3 bcfd of natural gas production was still shut in. Cumulative production lost Aug. 26-Dec. 12 totaled 101.7 million bbl of crude and 526.2 bcf of natural gas. That's equivalent to 18.6% of the crude and 14.4% of the natural gas produced annually from federal leases in the gulf.

(Online Dec. 12, 2005; author's e-mail:

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