Drilling ban boosts gas prices

Sam Fletcher
OGJ Senior Writer

US President Barack Obama’s May 30 ban against drilling in US waters deeper than 500 ft because of the Macondo blowout in the Gulf of Mexico helped drive up natural gas prices in the first days of June, industry analysts reported.

The July gas contract advanced 10.7¢ to $4.80/MMbtu June 4 on the New York Mercantile Exchange, posting “the biggest weekly gain of 11% since the week ended Dec. 18” due to increased summer cooling demand and reduced drilling for gas, said Anuj Sharma, research analyst at Pritchard Capital Partners LLC, Houston.

In the week ended June 4, Baker Hughes Inc. reported US drilling activity dropped for the first time in 6 weeks, down 29 rotary rigs to 1,506 still working. The number of rotary rigs drilling in US waters dropped by 24 with 24 units still working. That included the loss of 23 rigs in the gulf, with 23 still drilling. Of the US rigs still working, 947 were drilling for natural gas, 20 fewer than the previous week. The number of rigs still drilling for natural gas in the gulf declined 5 to 19. Land gas rigs were down 15 of which 4 were horizontal. Louisiana dropped 22 rigs to 191 still working. Texas lost 10 rigs to 646.

Although the glut of gas in storage weighs on prices, Sharma predicted the market will find support from higher industrial demand as the economy recovers and increased summer cooling demand, a likely “hyperactive” hurricane season, and a possible 500 MMcfd drop in gulf gas production this year due to the deepwater drilling moratorium.

Meanwhile, US coal prices have been climbing since the end of 2009, narrowing the price gap with gas in storage at Henry Hub, La. “We suspect this is a key explanation for why gas storage balances have been improving,” said Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC.

Sharma agreed higher coal prices have pushed the coal-to-gas switching parity price higher. “We estimate that for every dollar increase in Central Appalachian coal price, coal-to-gas switching floor moves up by approximately 6¢,” he said.

Oil prices fall
Oil prices dropped in early June as the European financial crisis spread and the US Department of Labor reported fewer-than-expected job additions during May.

A June 4 “flight to safety” by equity investors lifted the US dollar to a 4-year high against the euro. “Since all bets were on the economic recovery bailing us out of the European debt crisis, oil plunged 4.2% when the Labor Department reported that payrolls rose by only 431,000 in May, while the consensus called for a 536,000 gain,” Sharma said.

Private payrolls rose less than forecast and 411,000 of the 431,000 gain came from the temporary government hiring of the census workers. Prices were already feeling the pressure of the euro’s decline against the dollar as reports emerged that Hungary could be the next country to be afflicted by the European debt crisis, but fresh concerns about the strength of the US economic recovery is what broke the market’s back, he said. “We believe that although the recovery is rather jobless so far, the ingredients are there for it to pick up steam in the second half of the year.” Sharma said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Apart from the temporary additions from the census employment, there were only 20,000 jobs added to the nonfarm payrolls. This is problematic because the addition to the workforce for the census will soon be reversed and will therefore make it very likely that in coming months we start to see some negative numbers once again in the nonfarm payrolls.”

Jakob said, “Adjusting for the census employment, there has been only 455,000 jobs added in nonfarm payrolls this year. This makes an average per month of 91,000 jobs and compares [with] 6.8 million lost jobs since July 2008. In other words, at the current census-adjusted 2010 average, it will take 75 months or more than 6 years to reverse the job losses suffered since July 2008.”

Furthermore, Jakob said, “US unemployment rate fell slightly from 9.9% to 9.7%, which is a slow improvement. However, European unemployment numbers for April show that unemployment in Europe continues to increase and has moved from 10% in March to 10.1% in April. Therefore, until April, unemployment in the Atlantic Basin was still on a rising slope, with 3.8 million more unemployed than in April 2009 or 14.6 million more unemployed than in April 2008.”

(Online June 7, 2010; author’s e-mail: samf@ogjonline.com)

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