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Gas market seeks sign

Sam Fletcher
OGJ Senior Writer

Four consecutive weeks of smaller-than-expected injections of natural gas into US storage triggered a 12% price jump for the front-month contract on the New York Mercantile Exchange in mid-July in what some hoped might be the first sign that well shut-ins and reduced drilling may be decreasing supply.

The August contract bumped up to $3.67/MMbtu on July 16 after the Energy Information Administration reported the injection of 90 bcf of gas into US storage in the week ended July 10. Still, the price of the front-month gas contract was down 35% since the start of this year and 65% below year-ago levels. There was 2.886 tcf of working gas in storage as of July 10, up 589 bcf from a year ago and 454 bcf above the 5-year average.

Recent data “show a marked decline in weekly injection comparisons vs. 5-year historical averages,” acknowledged Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC. But the data may have been distorted by the Independence Day holiday. Therefore, Sieminski said, “It makes sense to await a couple more weeks of data before declaring a new trend. We actually expect a return to more bearish variances over the next 2 weeks.”

Meanwhile, drilling permits increased 4.3% in June (adjusted for comparable numbers of filing days) in 30 states monitored by Barclays Capital Inc., New York. “The month-to-month increase follows seven consecutive monthly declines. Permitting levels remain depressed, currently down 57% vs. last year, and we expect continued weakness in rig activity in the weeks and months ahead,” said Barclays Capital analysts.

Baker Hughes Inc. reported 920 rotary rigs working in the US in the week ended July 17. That’s down from 1,928 rigs drilling during the same period last year.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “Strength in natural gas came from a report showing that US daily LNG usage averaged 1.44 bcf in the second quarter, well short of the earlier estimates that called for 3-5 bcfd.” They added, “After checks with the LNG market observers, it seems there is too much focus on LNG.”

Current annual global LNG capacity is 180 million tonnes or 8.3 tcf of gas equivalent. However, Pritchard Capital analysts reported, “We have heard LNG processors are only running at 70% capacity, or 5.8 tcf/year.” Even if the US were to import all global production, LNG would meet only 25% of US natural gas requirements. Unless total LNG capacity increases dramatically, the analysts said, “It is unlikely that LNG could ever meet US demand. The long-term implication for US exploration and production companies is bullish as it necessitates the further development and production of US shale plays.”

The China syndrome
Crude futures prices rose above $62/bbl in mid-July following “a better-than-expected report on economic growth in China and a late-day rally in equities,” said analysts in the Houston office of Raymond James & Associates Inc.

But in some quarters there was “disappointment that the Chinese gross domestic product figure at 7.9% was in-line with the 7.8% estimate and not as high as the plus 8% whisper number some had hoped for,” said Pritchard Capital Partners.

Improvement in the Chinese economy prompted Olivier Jakob at Petromatrix, Zug, Switzerland, to question: “If China can grow at basically 8% when the rest of the world is into one of its deepest recessions, what will it be when consumer demand in the West starts to resurface?” Through April and May, Chinese crude oil runs were 650,000 b/d higher than a year ago (up 800,000 b/d in May). “As we have been writing before, in the oil markets as in the economy one needs to look East, not West,” said Jakob.

On the other hand, Sieminski said, “The main growth risk during the second half of this year stems from a slowdown in Chinese GDP growth, which we expect will take some time to reveal itself.”

At the Centre for Global Energy Studies, London, analysts said, “The fact that the Chinese economy is being driven in large part by state-sponsored lending should perhaps be cause for caution, as is the long-standing suspicion that official Chinese growth statistics might be biased upwards by massaged GDP deflators.”

Sieminski said commodity markets “need to be on alert for a further rise in risk aversion levels” that could threaten the global growth outlook, global equity markets, and commodity prices. Nonetheless, Sieminski said, “We are not yet convinced that this will prevent the US economy moving out of recession from October.”

(Online July 20, 2009; author’s e-mail: samf@ogjonline.com)


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