Heat lifts US natural gas prices

Sam Fletcher
Senior Writer

Natural gas futures prices escalated to a 5-week high July 26, peaking at $6.90/MMbtu in intraday trading on the New York Mercantile Exchange before closing at $6.89/MMbtu, up 47.8¢ for the day. The increase came as the August contract neared expiration amid predictions of continued hot weather and expectations of a small build in US gas storage.

Instead, the Energy Information Administration on July 27 reported the withdrawal of 7 bcf of natural gas from US underground storage in the week ended July 21, compared with an injection of 59 bcf the previous week and a revised injection of 39 bcf in the same period last year.

That marked the first-ever withdrawal of gas from storage in July or August and was caused in part by all-time high electric generation of 96,314 Gw that week with temperatures nearly 30% higher than normal, said analyst Robert S. Morris, Banc of America Securities LLC, New York. "The record demand for power forced all available generation capacity, including a significant number of less efficient natural gas peaker units, to run in many areas," he said.

US gas storage exceeded 2.7 tcf as of July 21, up by 379 bcf from year-ago levels and 490 bcf above the 5-year average. But if extreme summer temperatures were to persist, Morris said, demand "would preclude storage levels from approaching 3.6 tcf on Nov. 1."

Analysts at Simmons & Co. International, Houston, also expect hotter-than-normal weather, "similar to the 2005 summer," to eliminate much of the potential gas storage overhang this summer. Higher oil prices could trigger fuel-switching to cheaper natural gas, increasing demand and reducing storage by another 150 bcf, they said in a June 23 report.

That would be partially offset by increased US imports of LNG. Meanwhile, said Simmons analysts, "Assuming no hurricane activity, we expect natural gas prices to remain in the $5-8/MMbtu range."

On the other hand, Simmons & Co. said, "A mild summer would reduce demand for electricity and create a battle between natural gas-fired generation and coal-fired generation to serve a more modest load. It would also reduce the demand for peaking generation, thus limiting the demand from residual fuel oil switching. Assuming no hurricanes, the reduced demand would negatively impact prices and raise the potential that LNG is diverted to other international locations."

Gasoline use
In addition to increasing demand for natural gas, the recent heat wave across most of the US will increase gasoline consumption through vehicle air conditioning, said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

Based on a resurrected 2002 report on a study by the National Renewable Energy Laboratory of the US Department of Energy, Rousseau said, "Vehicle air conditioning accounts for 6% of total gasoline consumption in the US on average during the year and for upwards of 15% during the summer months (June-August). For a conventional vehicle, using air conditioning can increase fuel consumption by 35% (or drop fuel efficiency by 26%)."

The US East Coast Petroleum Administration for Defense District (PADD 1) accounts for 40% of the vehicle air conditioning demand since it has the most vehicles "and the top consuming state, Florida," Rousseau said. "For the summer of 2006, vehicle air conditioning should consume about 1.4 million b/d of gasoline, according to our estimates, and could be a surprise demand driver in the next few weeks."

Prices seesaw
Energy prices fluctuated in late July as traders tried to balance supply and demand factors while the war between Israel and the Hezbollah guerrillas in Lebanon dragged on and ceasefire negotiations foundered. Meanwhile, rebels renewed attacks on oil processing facilities in Nigeria. Royal Dutch Shell PLC shut in another 180,000 b/d of production in Nigeria because of a pipeline leak. The company had 650,000 b/d of Nigerian production shut in, primarily because of civil unrest in the Niger Delta.

"The current Middle East conflict is not the traditional argument over territorial issues. This fight appears to have been designed in Tehran with the intent of creating dissension among the various groups that are currently united by their common opposition to allowing Iran to have nuclear weapons," said Stephen A. Smith of Stephen Smith Energy Associates in Natchez, Miss.

"The standing of US policy across the [Middle East] region is being further eroded, and the situation appears to have gone well past the point when an end of hostilities might have returned affairs to something approximating the prewar status quo," said Paul Horsnell, Barclays Capital Inc., London.

(Online July 31, 2006; author's e-mail: samf@ogjonline.com)

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