Storage uncertainties undercut gas prices

Sam Fletcher
Senior Writer

The January natural gas contract registered the lowest closing price in 10 weeks on the New York futures market after the Energy Information Administration reported the withdrawal of 11 bcf of gas from underground storage in the week ended Dec. 1.

The contract finished at $7.67/MMbtu Dec. 7, down 5.6¢ after trading at $7.58-7.82/MMbtu that session on the New York Mercantile Exchange.

The withdrawal was less than expected by Wall Street analysts and left storage in excess of 3.4 tcf. "US natural gas withdrawal rates look modest so far, but the key period for withdrawals is yet to come," said analysts at Barclays Capital Inc., London.

Meanwhile, large withdrawals of gas from storage due to an abnormally cold spell during the same period in 2005 "may lead to a possible increase in the year-over-year natural gas storage surplus over the next few weeks," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "Despite this small hiccup, we still believe we will be an average of approximately 5 bcfd tighter throughout the withdrawal season."

That's based on Raymond James's estimates that gas supplies will be tighter by 250 MMcfd this season, while demand will be higher by 4.5 bcfd due to "the combined effect of a 1.75% year-over-year increase" in industrial demand. "Finally, we are forecasting a normal winter (as it relates to weather), which should translate into running about 2 bcfd tighter for the duration of the winter season. Based on these assumptions, we believe that the natural gas overhang experienced throughout the injection season will dissipate and winter storage levels should be in the range of 1.2-1.3 tcf, more in line with historical averages," Adkins said. As a result, he said, "We remain comfortable with our 2007 gas price forecast of $10[/MMbtu]."

OPEC production
After falling for three sessions, the January contract for benchmark US light, sweet crudes increased 30¢ to $62.49/bbl Dec. 7 on NYMEX when tanker-tracer Oil Movements reported the Organization of Petroleum Exporting Countries apparently had reduced production by 800,000 b/d.

That was still short of the 1.2 million b/d cut that OPEC members agreed to in October, effective Nov. 1, but up from the 550,000 b/d reduction previously estimated. By Dec. 8, the price was down again, to $62.03/bbl.

Some observers expected crude prices to escalate on a "risk premium" preceding the Dec. 14 OPEC meeting in Nigeria, "as well as the increased risk that Nigerian rebels use the occasion to embarrass the hosting government," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. Meanwhile, a second production cut proposed by some OPEC members was already being priced in, he said. Any additional cut would "need to be higher than 500,000 b/d to be a surprise," Jakob said.

Raymond James analysts in Houston said, "OPEC seems determined to defend and maintain oil prices above $60/bbl."

In a Dec. 6 report, Barclays Capital's Paul Horsnell said: "OPEC's next decision has been complicated because of exchange rate effects and because all the tightening to date has happened in oil products. We would not expect ministers to want to lessen the pressure on the supply side of the crude oil market. The overhang in US oil product inventories above their 5-year average has now completely disappeared."

Import outlook
EIA expects US imports of energy to grow moderately as a share of total demand during the next 25 years as rising prices spur domestic production of crude and reduce demand growth. It projects imports will rise to 32% of total US energy consumption in 2030 from 30% in 2005.

US demand for liquid fuels and other petroleum products is expected to escalate to 26.9 million b/d in 2030 from 20.7 million b/d in 2005, while domestic liquids production is projected to increase to 10.5 million b/d from 8.3 million b/d through expansion and improvement in refining capacity. EIA predicts US crude production will increase to 5.9 million b/d in 2017 from 5.2 million b/d in 2005, with output expected to decline after 2017 to 5.4 million b/d in 2030. The additional US oil is expected to be produced primarily from the deep waters of the Gulf of Mexico, said EIA officials.

US imports of natural gas are projected to grow to 26 tcf/year by 2030 from 22 tcf/year in 2005, with increased LNG imports compensating for an expected decline in Canadian supplies. Because of permitting problems, a new pipeline to transport Alaskan gas to the Lower 48 likely will not come on line before 2018, almost 3 years later than previously expected, said EIA officials.

(Online Dec. 11, 2006; author's e-mail:

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