Gas tests $8/MMbtu

Sam Fletcher
Senior Writer

The June natural gas contract briefly pushed past $8/MMbtu May 3-4 in a rally by hedge-fund investors that forced traders to cover short positions on the New York market.

The contract touched $8/MMbtu before it closed at $7.95/MMbtu May 3, up 21.7¢ for the day on the New York Mercantile Exchange. It climbed as high as $8.11/MMbtu May 4, before settling at $7.94/MMbtu. On the US spot market, however, gas at Henry Hub, La., lost 7¢ to $7.55/MMbtu May 3 and remained unchanged May 4.

"Futures prices through October were up 20¢ or more as hedge funds went on a calculated buying spree, forcing traders out of short positions ahead of rapidly increasing prices, which perpetuated the rally," said analysts at Enerfax Daily.

Robert S. Morris, Banc of America Securities LLC, New York, noted a 6.5% rise in composite spot gas prices over the five trading sessions that week. "Natural gas prices began the week with a strong rally as near-record warm temperatures permeated much of the country while technical factors boosted the near-month NYMEX futures contract to over $8/MMbtu," he said.

"Also, despite a higher-than-expected natural gas storage injection figure last week, and with the traditionally weak seasonal shoulder period upon us, natural gas futures prices also seem to be looking ahead with the official start of both the Atlantic Basin hurricane season and summer less than a month away," Morris said. "Most prognosticators are calling for a more-active-than-normal hurricane season and a warmer-than-normal summer."

Enerfax analysts said, "By all accounts the nation is flush with natural gas, and inventories are expected to build quickly over the next several weeks." Above-average temperatures were expected to stretch across the entire middle of the US and fan out to cover most of the US through mid-May.

Crude prices
Crude futures prices fell 7% Apr. 30-May 4 in the largest weekly decline since Jan. 5 in the New York market. "Oil prices started the week on a downward trend after supply fears that had stoked the market at the end of the prior week—when Saudi Arabia arrested 172 militants and thwarted a terrorist plot targeting its oil fields and oil infrastructure—eased," Morris said.

Otherwise, he said, the US crude and product inventory report through Apr. 27 was largely in line with expectations while the Department of Energy suspended refilling the US Strategic Petroleum Reserve until at least the end of the summer driving season because recent bids were "too high and not a reasonable value for taxpayers."

US crude inventory levels were 5% above the 5-year average on Apr. 27, said Raymond James analysts. However, they said, "Going forward, significantly below-average gasoline inventories and above-average demand for gasoline should continue to give support to crude prices, while many investors are beginning to look toward other commodity markets."

US gasoline inventories declined for 12 straight weeks through Apr. 27, and, as refiners come back online and increase refinery utilization, this will increase the US's crude demand, said Raymond James.

Meanwhile, Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, noted, "The main fundamental [crude market] change this year vs. 2005 or most of 2006 has been the re-creation of the Organization of Petroleum Exporting Countries' spare capacity through quota reduction." He said, "When OPEC production was operating at full capacity, producers had little incentive to hedge; whereas nowadays the incentive is to hedge more of the production on flat price increases in order to front-run any potential OPEC cheating. The resurgence of producer hedging will play a greater flat-price capping role than in the 2 previous years and was probably a factor in the failure of crude to break the resistance lines in the higher $60/bbl level.

"Gasoline demand is up 97,000 b/d, but production is up 241,000 b/d. Hence the US fundamentals situation stays unchanged," Jakob said. Despite production cuts this year by the Organization of Petroleum Exporting Countries, he said, "US refineries have so far faced no problems [finding] the required crude imports, while gasoline is not able yet to end its flirt with minimum of inventory levels."

Jakob also noted the reduction of the US Navy's armada in Middle East waters, with one aircraft carrier, the USS Eisenhower, sailing back through the Red Sea; another carrier, the USS Nimitz, currently in the Philippine Sea, leaving only the USS Stennis to cover Afghanistan. That, he said, "coincides with the goodwill attitude that has been shown before the start of the Iraq conference and is leading to a lowering of the Iranian premium [on world oil prices]."

(Online May 7, 2007; author's e-mail: samf@ogjonline.com)

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