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Gas withdrawal fails to move market

Sam Fletcher
Senior Writer

Energy commodity prices fell Feb. 14-15 as traders in the New York market focused on a smaller-than-expected drawdown of US distillate stocks but shrugged off a near-record withdrawal of natural gas from US underground storage during the coldest week of this winter.

The March contract for benchmark US light, sweet crudes lost $1.06 to $58/bbl Feb. 14, giving back most of its gain from the previous trading session on the New York Mercantile Exchange, as the Energy Information Administration reported distillate inventories fell 3 million bbl to 133.3 million bbl in the week ended Feb. 9, vs. a Wall Street consensus for a 4 million bbl draw. However, US crude inventories dropped 600,000 bbl to 323.9 million bbl, against consensus expectation for a 1 million bbl build. That followed a loss of 400,000 bbl the prior week. Gasoline stocks were down by 2.1 million bbl against expectations for a 2.1 million bbl build.

On Feb. 15, March crude and gas contracts flirted with 2-week low prices before battling back to near-starting positions on NYMEX, despite an EIA report that same day of the second largest withdrawal ever of gas from US storage, 259 bcf in the week ended Feb. 9. It was the biggest weekly withdrawal so far this winter, larger than the consensus among Wall Street analysts, and second only to the all-time high of 260 bcf withdrawn in the week ended Jan. 17, 1997.

The related withdrawal of 179 bcf of gas from storage in the east region of the US also was an all-time high for that area, said Robert S. Morris, Banc of America Securities LLC, New York. "We believe the record withdrawal in the east region was impacted by fuel switching and infrastructure constraints," he said. That left US gas storage at nearly 2.1 tcf, 193 bcf below year-ago levels but 268 bcf above the 5-year average. "Assuming normal weather to the end of the winter season, it seems that we are heading to an ending storage level of 1.3 tcf [in March], which falls inline with the historic average. Thus, the effects of the warmer-than-normal weather in 2006 and its resulting natural gas surplus would finally dissipate," said analysts in the Houston office of Raymond James & Associates Inc.

On Feb. 15, the March gas contract traded at $7.05-7.38/MMbtu before closing at $7.29/MMbtu, up by 5.1¢ for the day on NYMEX. "Failure of the market to drop past the 2-week low of $7.05 earlier in the session may have spurred buying," said analysts at Enerfax Daily. The March crude contract traded at $56.62-58.51/bbl before closing at $57.99/bbl.That volatility was due in large part to traders covering market positions ahead of a long weekend, since floor trading at NYMEX was closed Feb. 19 for the Presidents Day holiday in the US. Moreover, the March crude contract was scheduled to expire Feb. 20.

Market outlook
The Feb. 14 data—especially the unexpected drop in gasoline inventories—were "positive for refiners," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va. "Total refined product inventories showed their largest week-over-week decline in over 3 months, as production and import gains were insufficient to meet increased consumption. We expect this trend of declining inventories to continue over the next several weeks, as refinery maintenance season continues, putting upward pressure on refining margins and refiner stock prices," he said.

"Heating oil is dragging down the energy complex with the combination of the winter phase-out and weather patterns that are calling for temperatures to be normal to above-normal in the last week of [February]," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The dollar weakness should provide some support [for energy prices]. Gold is at multimonth high and the equities continue to make new record highs," he said Feb. 14.

Based on preliminary estimates, imports of LNG into the US will likely average nearly 1.7 bcfd through January-February, "which is essentially in-line with our prior forecast, and compares with just over 1.3 bcfd, on average, during the first 2 months of last year," Morris said. He noted that natural gas prices in the US "have been nearly $2/MMbtu higher than UK prices year-to-date vs. more than $2/MMbtu lower during the same period last year." As a result, he said, imports of LNG should increase to 2.5 bcfd, or 4.5% of total estimated US gas supply. That would be "a nearly 50% uptick vs. last year, which also largely reflects increased liquefaction capacity around the globe," Morris said.

(Online Feb. 19, 2007; author's e-mail: samf@ogjonline.com)


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