Natural gas futures fell below $5/MMbtu Sept. 14 to the lowest level in 2 years on the New York market after the US Energy Information Administration reported a large leap in US gas storage.
EIA reported the injection of 108 bcf of gas into US underground storage during the week ended Sept. 8 (OGJ Online, Sept. 14, 2006). That was the first triple-digit increase since June 3, 2005, up substantially from 71 bcf the previous week and 89 bcf during the same period a year ago. Gas injections normally increase during the week of the US Labor Day holiday—this year on Sept. 4—when power plants' demand for gas is curtailed because of closed offices and factories.
That brought total US gas storage above 3 tcf, up 339 bcf from the same period last year and 341 bcf above the 5-year average. It also was the earliest time by 2 weeks that US gas storage passed the 3 tcf mark, said analysts at Enerfax Daily. "Mild weather since the start of August decreased power plant demand for natural gas and let storage caverns fill quickly," they said.
In a separate report, analysts in the Houston office of Raymond James & Associates Inc., said, "It now appears as if we are going to test full storage, which means more volatility and the chance of gas-on-gas competition likely. This will lower prices in certain regions until producers start shutting in when no more injections in the system are possible."
Raymond James analysts said, "Historically, we have never seen higher than 3.4 tcf in storage, and we estimate that the most that can go in is approximately 3.5 tcf. If storage continues this build and we start the year with unprecedented levels, this may have a meaningful impact on 'resetting' forces in 2007.
The October gas contract fell 55.7¢ to $4.89/MMbtu Sept. 14 on the New York Mercantile Exchange, but regained 9¢ in the next session.
As expected, ministers of the Organization of the Petroleum Exporting Countries made no changes in their official production quota during a brief meeting Sept. 11 in Vienna. But that lack of action did not signal "simple maintenance of the status quo," said Paul Horsnell at Barclays Capital Inc., London.
Statements issued by OPEC at the end of previous meetings "explicitly expressed a commitment to the 28 million b/d target ceiling or clearly stated that ministers had chosen to maintain the status quo," Horsnell noted. But there was no such message in September. Instead, Horsnell perceived "a signal that [OPEC] output will fall further if needed, without necessarily having to make explicit short-term changes in the target ceiling."
Horsnell said, "Indeed, combine the lack of commitment to the ceiling with the observations made in the communiqué first that supply exceeds demand, and second that OPEC will balance supply and demand, and there is the strong implication that actual output cuts are a base case unless prices rebound.
"The line is being drawn not very far below current price levels, if not at current price levels. While prices in the $70s were not going to be proactively defended, the $60s are a different proposition," Horsnell said.
The primary topic at the meeting "was clearly the determination of a price floor, below which OPEC should cut its production," said Frederic Lasserre, head of commodities research at the Societe Generale (SG) corporate investment-banking group. He said, "The organization is more worried by the short-term prospects than by the medium-term ones. For instance, the Saudi oil minister confirms 2007 oil demand prospects remain very positive despite the expected slowdown in the US and world economic growth while the OPEC president had to remind [members] the organization does not have any official floor to defend."
Lasserre said, "Since OPEC has officially abandoned any official price band, the debate on the floor has been useless as the market has been more or less a one-way market. Over the last 2 years, the key concern was more the price level [that] would damage the world economy. From time to time, isolated comments from some members indicated that this floor was more or less 'around $50/bbl' (based on the OPEC basket which is trading now at a discount of $2.70/bbl to Brent ICE). At that time, SG agreed this level would be appropriate to both finance future production without damaging demand."
OPEC said it would reassess market conditions at its next meeting Dec. 14 in Nigeria. Both the International Energy Agency in Paris and the US Department of Energy reduced their forecasts of world demand for crude this year in separate reports Sept. 12.
(Online Sept. 18, 2006; author's e-mail: firstname.lastname@example.org)