MARKET WATCH: Gas futures price drops below $5/MMbtu

Sam Fletcher
Senior Writer

HOUSTON, Jan. 15 -- The front-month natural gas contract closed below $5/MMbtu Jan. 14 on the New York market for the first time since September 2006 amid worries of eventual diminished demand even as bitter winter cold envelopes the US from Montana to Maine and as far south as North Carolina.

Crude prices continued to decline as the US Energy Information Administration reported a sharp spike in distillate fuel inventories and new record storage levels of crude and distillates at Cushing, Okla. EIA said distillate fuels shot up 6.4 million bbl to 144.2 million bbl in the week ended Jan. 9—far exceeding expectations of a 1 million bbl increase (OGJ Online, Jan. 14, 2009). Commercial US crude inventories increased 1.2 million bbl to 326.6 million bbl in the same period, less than half of Wall Street's consensus of a 2.8 million bbl build. Gasoline stocks jumped by 2.1 million bbl to 213.5 bbl, exceeding Wall Street expectations of a 2 million bbl increase.

Some analysts immediately questioned the accuracy of EIA numbers, however. The reported 6.3 million bbl build in middle distillates included a 4.1 million bbl increase of low-sulfur diesel in Petroleum Administration Defense District 2 in the Midwest that includes the Cushing storage and delivery point. That would be the largest-ever weekly change in distillate stock in that district, said Olivier Jakob at Petromatrix, Zug, Switzerland.

Moreover, it "implies a 53% drop" in PADD 2 demand within 1 week—"a drop that we think is materially impossible," Jakob said. He and others suspect the large distillate increase in the latest report includes undisclosed revisions to previous EIA data. As a result, EIA may have under-reported demand for middle distillates by 700,000 b/d, Jakob said.

The latest EIA report showed crude storage at Cushing up by 800,000 bbl to a new record high. But although Cushing storage is virtually at maximum capacity, that is "not true for the US as a whole," said Paul Horsnell, Barclays Capital Inc., London. He noted total US commercial crude inventories have increased by 18.4 million bbl over the last 3 months, including an increase of 18.1 million bbl at Cushing. "In other words, for the whole of the US outside of Cushing, crude inventories have risen by just 300,000 bbl over the past 3 months, (from 293.3 million bbl to 293.6 million bbl), and they currently stand almost 40 million bbl lower than as recently as mid-2007," Horsnell said.

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. reported, "Commodity prices and energy indices closed out [2008] much the same way they have ended the previous several months—down hard. This compared with the relatively quiet broader markets, which seem to be trading in a narrow range over the past month and a half. It looks as if 2008 global oil demand was negative on a year-over-year basis for the first time in over 20 years, which makes one wonder, 'How bad will 2009 get?'"

However, Horsnell claimed the "scale of the dislocations" in the oil market "have grown so enormously" that the tumbling price of West Texas Intermediate "has become about as useful as a chocolate oven-glove" in assessing broader market conditions. "The dynamics of the US crude oil market have become increasingly bizarre in recent weeks" to the point that the oil price mechanism "has got stuck in a fairly vicious loop," Horsnell said. "The problem is that WTI prices are being used in a wider context: crude oil exporters link to them for the US market, derivatives are based on them, investment returns are affected by their time spreads, and policymakers in both consuming and producing countries use them as an indicator," he said.

Energy prices
The February contract for benchmark US sweet, light crudes traded at $35.52-39.45/bbl Jan. 14 on the New York Mercantile Exchange before closing at $37.28/bbl, down 50¢ for the day. The March contract dropped 58¢ to $44.19/bbl. On the US spot market, WTI at Cushing was down 50¢ to $37.28/bbl. Heating oil for February lost 5.1¢ to $1.46/gal on NYMEX. However, the February contract for reformulated blend stock for oxygenate blending (RBOB) increased 1.88¢ to $1.17/gal.

Natural gas for the same month dropped 21.4¢ to $4.97/MMbtu on NYMEX, where analysts expect it soon to test the $4.50 barrier. On the US spot market, gas at Henry Hub, La., lost 19.5¢ to $5.42/MMbtu. EIA reported the withdrawal of 94 bcf of gas from US underground storage in the week ended Jan. 9. That left 2.7 tcf of working gas in storage, up 28 bcf from the same period in 2008 and 81 bcf above the 5-year average.

Raymond James analysts said, "Gas suffered another large fall in December (down 14%), though it has remained relatively flat so far in January. Supply remains up huge year-over-year, and the recessionary environment appears to be having a major effect on demand. To make matters worse, low oil prices could actually contribute to gas-to-oil fuel switching in the Northeast (which would lower demand even more)."

In London, the February IPE contract for North Sea Brent crude gained 25¢ to $45.08/bbl. The February gas oil contract fell $19.50 to $457.50/tonne, giving back most of its gain from the previous session.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes advanced by $1.31 to $41.31/bbl on Jan. 14.

Contact Sam Fletcher at samf@ogjonline.com.

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