MARKET WATCH
Natural gas, oil prices fall

Sam Fletcher
Senior Writer

HOUSTON, May 22 -- Energy prices fell May 21 with the biggest one-day drop in natural gas futures prices since August 2007 as the major US equity stock indexes were hammered and the dollar gained in value.

The front-month crude contract fell from a 6-month high but remained above $61/bbl on the New York Mercantile Exchange.

Energy company stocks fell even harder than the broader equity market and oil prices, said analysts in the Houston office of Raymond James & Associates Inc.

With the Dow Jones Industrial Average down more than 2% and the sharp drop in the price of natural gas, the fact that crude could sustain above $60/bbl is "further confirmation that crude oil is starting to have a trading life of its own rather than being a pure correlation to equities that even a 5-year-old could trade," said Olivier Jakob at Petromatrix, Zug, Switzerland.

In New Orleans, analysts at Pritchard Capital Partners LLC said, "On a historic basis at 17 times the price of natural gas, oil is trading way above the historical 7:10 ratio. However, concerns over the dollar and its sovereign credit rating may help crude hold the $60 level provided investors see crude as an alternative to the dollar."

Raymond James analysts said, "The real fireworks were in the gas market where prices plummeted 9%" after the Energy Information Administration reported the injection of 103 bcf of natural gas into US underground storage in the week ended May 15. That put working gas in storage at 2.1 tcf, up 514 bcf from year-ago levels and 387 bcf above the 5-year average (OGJ Online, May 21, 2009).

"As [the latest] storage number shows, the market is still over-supplied, and the drastic fall in the rig count was most likely too late to save the market from dismal summer gas prices. Be it delayed completions, choking back wells, or completely unplugging the Christmas tree, we still believe there will have to be substantial shut-ins this summer," Raymond James said.

Pritchard Capital analysts said, "The 9.3% drop in the NYMEX natural gas front-month contract seemed completely trading driven as the price action on the physical hubs was fairly subdued, and approximately half of the hubs we monitor traded up on [May 21] despite the pounding NYMEX natural gas took. The physical markets are not moving in lock step with the NYMEX 'trading' market." They said, "If the physical markets do not follow the NYMEX market in next few days, the sell-off may just have been a trading event."

Meanwhile, Boardwalk Pipeline Partners LP, a natural gas transportation company, significantly reduced capacity on several pipelines for testing and repairs during May after discovering anomalies on some expansion pipelines.

"According to a company update, portions related to Gulf South (East Texas and Southeast Expansion pipelines) will be available for service through June but are anticipated to incur reduced capacity in July, while Gulf Crossing will be shut in for the entire month of June," Raymond James analysts said. "We continue to expect that second and third quarter volumes will be negatively impacted until the anomalies are remediated, and that the associated revenue impact, incremental costs incurred, and timing as to when the pipelines will return to full service remain unclear."

In other news, Jakob said, "Russia is sending more and more soundbites that the Ukraine will not be able to pay for its natural gas and that a new crisis is around the corner. Natural gas stocks in Europe have been seasonally rebuilding, but if stock levels in the UK are now above the levels of a year ago, in Germany they are still on the same day half the levels of 2008. France and Italy are also behind, hence we will need to continuously monitor the evolution of the Russia-Ukraine natural gas row."

This week the Department of Transportation published its monthly Traffic Volume Trends report showing a 1.2% decline in total miles driven on US roads and highways in March from year-ago levels, compared with a 2.7% increase in February on a daily basis.

Energy prices
The July contract for benchmark US light, sweet crudes dropped 99¢ to $61.05/bbl May 21 on NYMEX. The August contract lost 81¢ to $61.81/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., fell $1.47 to $60.55/bbl as it tried to adjust to the new front-month futures contract. Heating oil for June delivery declined 1.17¢ to $1.53/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month slipped 0.98¢ to $1.80/gal.

The June contract for natural gas fell 36.7¢ to $3.60/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 14.5¢ to $3.65/MMbtu.

In London, the July IPE contract for North Sea Brent was down 66¢ to $59.93/bbl. Gas oil for June lost $4.75 to $476.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes declined 15¢ to $58.32/bbl on May 21.

Contact Sam Fletcher at samf@ogjonline.com

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