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Natural gas prices spiral down

Sam Fletcher
Senior Writer

With the US heating season officially expiring at the end of March, natural gas prices continued spiraling down earlier this month after the Energy Information Administration reported a lower-than-expected withdrawal of 85 bcf of natural gas from underground storage during the week ended Mar. 3.

"The earlier promise of cold temperatures in March is starting to fizzle out, but heating demand and storage withdrawals have picked up in recent weeks—albeit not enough to greatly affect the sizable storage surplus amassed over the course of the mild winter," said Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York, in a Mar. 10 report.

Analysts at Enerfax Daily said, "Total gas in storage is now over 54% above the 5-year average for this date. Based on the temperature forecast through late March, it is almost certain that natural gas in storage will start the injection season in April with by far the most gas ever already in the ground, thereby depressing fresh storage demand."

Barone said: "With so much gas in storage and so little absorbed by the market this season, many storage operators have started to enforce stipulated minimum withdrawal requirements in order to depressurize and maintain the integrity of storage caverns. As those mandatory withdrawals—estimated to be between 375 to 400 bcf—flood the market, gas prices are likely to continue in their downward trend. However, strong industrial demand coming back on line at these depressed gas prices may absorb some of the gas in storage before it hits the market."

However, Enerfax analysts said, "Near-month futures [contracts] may be resisting new lows not only for technical but also fundamental reasons. Owners of stored gas may choose where possible to hedge their position by selling winter 2006-07 futures that are over $3[/MMbtu] higher than the spot month."

The April natural gas contract closed at $6.65/MMbtu on Mar. 10, actually up by 4.5¢ for the day "on short-covering ahead of the weekend after a bearish storage report," said Enerfax Daily analysts. However, the price was down by 2.1% for the week and had plunged 58% from its record peak of $15.78/MMbtu in December.

Oil futures prices also were on a downswing Mar. 6-10 in expectation that the Organization of Petroleum Exporting Countries would not increase its production quota at its Mar. 8 meeting.

Below-consensus report
The EIA reported Mar. 9 the withdrawal of 85 bcf of natural gas from US underground storage during the week ended Mar. 3. That was below the consensus of Wall Street analysts and down from withdrawals of 171 bcf the previous week and 139 bcf in the same period last year. That left US gas storage at 1.89 tcf, up 393 bcf from year-ago figures and 664 bcf above the 5-year average.

"Storage withdrawals over the remaining weeks would have to average 95 bcf to even break below 1.5 tcf by the end of March," said analysts at Enerfax Daily prior to the latest EIA report.

The latest lower-than-expected withdrawal figure "was due to a lack of either heating or cooling demand in the producing region," said Robert S. Morris at Banc of America Securities LLC, New York. Meanwhile, he said, "Gas storage withdrawals over the next couple of weeks will likely be boosted, on the one hand, by significant coal and nuclear plant maintenance but partially offset, on the other hand, by higher-than-normal refinery shut-downs for seasonal maintenance."

EIA earlier reported commercial inventories of US crude jumped by 6.8 million bbl to 335.1 million bbl in the week ended Mar. 3 (OGJ Online, Mar. 8, 2006). Gasoline stocks fell by 1.1 million bbl to 224.8 million bbl during the same period. Distillate fuel inventories dropped by 2.7 million bbl to 131.4 million bbl.

The US Minerals Management Service said Mar. 8 that 87 platforms on federal oil and gas leases in the Gulf of Mexico are still idle as a result of damage inflicted when Katrina roared through the central gulf last August, followed by Rita in September. Some 1.4 bcfd, or a little more than 14%, of gas production from the gulf is still shut in, as is 348,253 b/d, or 23.2%, of crude production. Cumulative production lost since Aug. 26 when Katrina hit that area now stands at 672.7 bcf of gas and 134.5 million bbl of crude. That's equivalent to 18.4% of the gas and 24.6% of the crude produced annually from federal leases in the gulf.

(Online Mar. 13, 2006; author's e-mail: samf@ogjonline.com)


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