MARKET WATCH: Gas drops to 7-year low of under $3/MMbtu

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 21 -- Natural gas dropped to a 7-year low to less than $3/MMbtu Aug. 20 in New York market despite the US Energy Information Administration reporting a lower-than-expected injection of gas into US storage; the expiring September contract for benchmark US crude crept higher in mixed and volatile trading.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “Over the past 12 weeks finished [gasoline] demand, as reported by the EIA, has been well below its 5-year average and last week freight traffic across North America was down nearly 18% year-over-year. Crude prices have been range-bound for nearly 3 months between $60-73/bbl and, as we expect demand for crude products to remain below their 5-year average through 2009, prices will continue to trade in this range unless the US dollar is materially devalued or investor sentiment regarding a global economic recovery changes, impacting crude demand in 2010.”

Analysts in the Houston office of Raymond James & Associates Inc. advised, “Expect [gas] prices to trend even lower as the market realizes that we are headed for full storage in the coming months,” In early trading Aug. 21, oil prices increased to the highest levels of this year, “likely due to a slightly weaker dollar,” they said.

In a speech at an annual Federal Reserve conference in Jackson Hole, Wyo., Fed Chairman Ben Bernanke said economic activity appears to be “leveling out” in both the US and around the world and “prospects for a return to growth in the near term appear good.” As a result, the central bank has taken steps to pull back some economic emergency programs.

Meanwhile, the National Association of Realtors said home sales rose 7.2% to a seasonally adjusted annual rate of 5.24 million in July, from 4.89 million in June. It was the largest monthly increase in at least 10 years as first-time home buyers rushed to take advantage of a tax credit that expires this fall. It marked the fourth consecutive monthly increase and the highest level of sales since August 2007.

On Aug. 20, the US Department of Labor said the number of first-time unemployment claims rose unexpectedly for the second consecutive week. Moreover, the Mortgage Bankers Association reported more than 13% of homeowners with a mortgage are either behind on their payments or in foreclosure. Mortgage delinquencies hit another record high in the second quarter, said Pritchard Capital Partners.

EIA said commercial US inventories of benchmark crudes plunged a whopping 8.4 million bbl to 343.6 million bbl in the week ended Aug. 14. Gasoline stocks fell 2.1 million bbl to 209.8 million bbl in the same period. Distillate fuel inventories declined by 700,000 bbl to 161.6 million bbl (OGJ Online, Aug. 19, 2009).

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “Despite the high level of [crude] stocks in Cushing, [Okla.,] the expiring West Texas Intermediate spread (September-October) closed at the narrowest contango of the year and in a lesser contango than the September-October expiry of last year, even if Cushing stocks are almost double the levels of a year ago. Stocks in Cushing are high, but if they are filled up with heavy Canadian crude oil that cannot be delivered, then the only thing that really matters is the stock-to-tank capacity ratio, and since Cushing has seen an increase of shell capacity over last year, it is difficult to determine if its capacity utilization is any higher than a year or 2 years ago.”

Jakob cautioned, “Hurricane Bill will hit Canada over the weekend, probably still with Category 1 strength. The main risk exposure will be on the Dartmouth Halifax 90,000 b/d and the Come By Chance 115,000 b/d refineries.”

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “There is a very strong rise in negative correlation between the gasoline pump price and demand at prices above $3.50/gal, equivalent to around $3/gal on the New York Mercantile Exchange gasoline contract. With prices still well under this threshold, as the economy starts to recover, income elasticities may begin to dominate and offer some positive support to gasoline demand.”

Net electricity generation in the US dropped more than 4% in May from year-ago levels. Sieminski noted, “Preliminary data for June and July suggest the trend continued with year-over-year declines in the 5-6% range, driven by falling gross domestic product, declining industrial production, and below-average summer temperatures across most of the US. Gas use for electricity rose and coal use fell. This pattern is expected to continue into the second half and eventually will help improve gas supply-demand balances.”

Energy prices
The expiring September contract for benchmark US sweet, light crudes rose 12¢ to $72.54/bbl Aug. 20 on NYMEX. However, the October contract dropped 92¢ to $72.91/bbl. On the US spot market, WTI at Cushing was up 12¢ to $72.54/bbl. Heating oil for September delivery lost 3.35¢ to $1.89/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month fell 5.24¢ to $1.98/gal, wiping out much of the gains from the previous short rally.

The September contract for natural gas fell 17.4¢ to $2.95/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 2¢ to $3.02/MMbtu.

In London, the September IPE contract for North Sea Brent declined $1.26 to $73.33/bbl. Gas oil for September was up $3.25 to $603.75/tonne

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $1.44 to $72.57/bbl on Aug. 20.

Contact Sam Fletcher at samf@ogjonline.com.

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