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US weather boosts energy price volatility

Sam Fletcher
Senior Writer

With weather still the primary influence over US energy marekts, price volatility increased through December and into January, particularly for natural gas.

In less than a month, the price for the front-month natural gas contract plunged from a high of $15.78/MMbtu on Dec. 13 to the lowest level since July 29, 2005.

"Front-month gas futures slipped from the $13-14[/MMbtu] range at the beginning of December to the $11-12 range by the end of the month, as concerns over colder-than-normal weather subsided," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. However, Adkins said, "Gas prices remained well above 6:1 parity with oil."

Unusual build
On Jan. 5, the US Energy Information Administration reported the first ever December build in US natural gas storage, with 1 bcf of gas injected into storage in the week ended Dec. 30. That compared with draws of 162 bcf the previous week and 151 bcf during the same period in 2004. More than a third of the way through the winter heating season, US gas storage stood at 2.6 tcf, down by 79 bcf from year-ago levels but 168 bcf above the 5-year average (OGJ Online, Jan. 5, 2006).

As a result, the February natural gas contract closed at $9.50/MMbtu Jan. 5, down 69.8¢ after trading as low as $9.39/MMbtu that session on the New York Mercantile Exchange. The February natural gas contract rebounded to $9.63/MMbtu Jan. 6 on NYMEX then fell to $9.36/MMbtu Jan. 9, down 27.2¢ for the day after trading as low as $9.15/MMbtu during the session, the lowest level since July 29. With mild weather forecast for much of the US, heating fuel demand was projected to be a third below normal, said analysts at Enerfax Daily.

"We believe this unprecedented injection (assuming it is not revised) more likely reflects the large economic incentive to inject natural gas during a week with minimal heating demand . . . rather than any significant increase in the level of 'backed-out' demand, especially given the substantial drop in natural gas prices in recent weeks," said Robert S. Morris at Banc of America Securities LLC, New York. He earlier reported US temperatures during the last week of December, based on gas home-heating customer-weighted heating degree days, "were roughly 32% warmer than last year, roughly 34% warmer than the 10-year average, and almost 34% warmer than the prior week." Morris said, "Winter to date, which accounts for roughly 37% of the total heating degree days in the average winter, temperatures this year have been 1.1% colder than the 10-year average."

Other market factors included holiday-related shutdowns of industrial and business customers and "the mandated drawdown of pipeline pressures (i.e., 'reverse line pack') on certain lines such as Questar [Corp.]'s Southern system, which issued an open-flow-order," Morris said.

Meanwhile, the US Minerals Management Service said Jan. 9 that 100 production platforms on federal leases in the Gulf of Mexico are still listed as evacuated in the wake of hurricanes last summer. The amount of production from federal leases that is still shut in is 402,259 b/d, or 26.8% of the crude, and 1.9 bcfd, or 18.6%, of the natural gas from those waters.

Cumulative production lost since Aug. 26 totaled 113.2 million bbl of crude and 581.7 bcf of natural gas. That is equivalent to 20.7% of the oil and 15.9% of the natural gas produced annually from federal leases in the Gulf of Mexico.

Crude stocks
EIA reported Jan. 5 that commercial US crude inventories declined by 1 million bbl to 321.6 million bbl in the last week of December. Gasoline stocks gained 1.4 million bbl to 204.3 million bbl, and distillate fuel inventories rose by 2.1 million bbl to 128.9 million bbl.

Petroleum product inventories "typically rise the last week of the year due to the slowdown of work commuting, and since demand remains strong, we maintain our positive outlook on the refining sector and expect that refining margins will be supported by falling inventories," said Jacques Rousseau at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.

US gasoline demand reached its highest level since the August peak, while inventories remain tight, particularly on the East Coast, said Paul Horsnell of Barclays Capital Inc., London.

"After all the gnashing of teeth about demand destruction, waves of imports, and the build-up in commercial inventories of what were previously strategic stocks, the final result has actually been a tightening for the US and Japan combined," Horsnell said.

(Online Jan. 9, 2006; author's e-mail: samf@ogjonline.com)


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