October gas contract ends near 4-year low

Sam Fletcher
Senior Editor

The expiring October natural gas contract dropped to a near 4-year low on the New York Mercantile Exchange during the last week of September, while crude prices continued to fluctuate as traders speculated whether the Organization of Petroleum Exporting Countries might soon cut production.

The October natural gas contract expired at $4.20/MMbtu Sept. 27 after trading as low as $4.07/MMbtu during that session in anticipation of a continued build in winter storage. The November gas contract continued to fall, down by 27.7¢ to $5.39/MMbtu Sept. 28 on NYMEX.

Gas storage
The US Energy Information Administration reported the injection of 77 bcf of gas into US underground storage in the week ended Sept. 22, down from 93 bcf injected the previous week (OGJ Online, Sept. 28, 2006). US gas storage then stood at nearly 3.3 tcf, up by 377 bcf from year-ago levels and 354 bcf above the 5-year average.

That reduced injection rate "reflects the start of some 'line pack' issues [gas occupying pressurized sections of the pipeline network] along with perhaps some constrained wellhead output concurrent with the pipeline pressure builds and, in our opinion, is not the result of any sudden sharp uptick in demand due to the drop in natural gas prices," said Robert S. Morris, Banc of America Securities LLC, New York.

Analysts with Raymond James & Associates Inc. in Houston said, "We now anticipate. . .gas storage levels will be between 3.4-3.6 tcf at the end of October. Because this is likely to test the limits of full storage (non-coincidental storage from each region over the past 12 years has only totaled as high as approximately 3.467 tcf including salt dome additions), gas should still be extremely volatile over the course of the next 6 weeks."

Analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., said they see similarities between the present gas market and 2001 "when gas fell from $10.20 to $1.74 but rebounded in 2002, even as storage was at record levels." They said, "We maintain our bullish outlook on the E&P sector but recognize that the near term looks volatile."

FBR analysts said, "Multiple near-term catalysts should positively influence the commodity. Gas storage is showing a 380 bcf overhang (7 days demand), which should be whittled away by declining production, rebounding industrial demand, and normal winter weather.. . . High initial decline rates across major US basins provide further cover, despite robust rig counts and capital programs. We have begun to see producers shutting in marginal wells as prices hover below cash margins in high-cost basins."

In a separate report in late September, EIA said US gas reserves grew by 6% in 2005, the largest annual increase in 35 years, with onshore gas reserves up for the seventh consecutive year, offsetting a 10% decrease in gas reserves in US waters of the Gulf of Mexico (OGJ Online, Sept. 28, 2006). However, Morris said a survey in May of Banc of America Securities' group of 55 independents and 12 major integrated companies, representing 58% of total US gas reserves, showed their proven reserves (including revisions and "improved recovery") increased 12% in 2005.

Total US gas production declined 4% in 2005 because Hurricanes Katrina and Rita shut in 80% of gulf production, EIA said. Gulf gas production was in 10% annual decline prior to those hurricanes. EIA reported US crude reserves also increased in 2005 for the first time in 3 years.

Oil price fluctuates
The November contract for benchmark US light, sweet crudes temporarily touched $64/bbl Sept. 28 on reports from Nigeria of possible OPEC action to shore up prices. But it closed at $62.76/bbl, down 20¢ for the day on NYMEX after OPEC dispelled those rumors. "We believe the commotion could be an attempt to 'talk up the markets' in the heat of considerable plunges in crude prices, and if any OPEC producer were to reduce supply, it would likely be countries that are currently producing above their quota (Saudi Arabia and other Persian Gulf producers), as opposed to Nigeria, where output has declined by 800,000 b/d in the last few months," said Raymond James analysts.

Meanwhile, US gasoline demand trends remained positive, with gasoline imports up "a surprisingly large 660,000 b/d (83%)" during the week ended Sept. 22, said FBR analysts. "Given the large decline in US refined product margins that has occurred over the past month and the commencement of European maintenance season, we expect imports to decrease materially over the coming weeks," they said.

(Online Oct. 2, 2006; author's e-mail: samf@ogjonline.com)

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