MARKET WATCH: Natural gas price is 'resurrected'

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 29 -- The price of natural gas “rose from the grave of its 13-month lows,” rebounding 3.4% after the front-month contract rolled Oct. 28 in the New York market, and the crude price also advanced.

Assessing the early market on Oct. 29, analysts in the Houston office of Raymond James & Associates Inc. said gas “is making its way back to the $4/Mcf twilight zone and is up about 1% while crude is flat.”

They reported, “The broader markets remained flat yesterday as investors were spooked…because next week's events could substantially alter monetary policy and legislative direction. With elections and the Federal Reserve rate decision on the horizon, one question is haunting investor dreams: will the results be tricks or treats?”

A “bullish storage figure” helped buoy natural gas prices Oct. 28, with the Energy Information Administration reporting the injection of 71 bcf of natural gas into US underground storage in the week ended Oct. 22. That brought working gas in storage to more than 3.75 tcf, down 1 bcf from the comparable week last year but 312 bcf above the 5-year average. The Wall Street consensus was for an injection of 73 bcf.

“But in light of other evidence in the market, we are still inclined to be cautious in our [gas] price outlook. Supply and demand fundamentals have improved but are still not strong,” said Adam Sieminski, chief energy economist for Deutsche Bank in Washington, DC. “Growth in the Bakken oil play and in overall natural gas liquids is providing a kick to US liquids production that could end up surprising the non-OPEC supply bears who are looking for declines in oil output.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, reported the dollar weakened on speculation that the Federal Reserve System soon will have to induce another round of “quantitative easing” (QE2) as economic recovery remains tepid. “The market is now expecting that an announcement on QE2 could come as early as Nov. 3, after the Nov. 2 Fed meeting. With the very high probability of Fed’s action, we expect crude to remain joined at the hip with the greenback and the fundamentals to provide just a backdrop for the time being,” Sharma said.

Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, said, “As October draws to a close, front-month crude ended more or less where it started, with some rather volatile sessions in between. Most of the volatility comes from dollar moves, which has been driven by speculation on the Fed’s QE move for the past month. Even a prolonged French strike and huge [EIA] weekly inventory changes failed to break the close correlation between dollar and oil.”

French port workers at Le Havre voted to end their strike, following the lead of workers at three refineries earlier this week. “The high oil inventory has avoided panic and severe price actions which otherwise might have been caused by such a long and wide-spread strike,” De Wet said.

Sieminski said, “China raised retail gasoline and diesel prices this week by 3%, reversing the cut made in June. The price hike will have a limited impact on curbing end-user demand but will be supportive for domestic refinery margins and will erode the export margin for gasoline and diesel in our view.”

In other news, the EIA reported monthly revisions of demand and supply, increasing overall US oil demand by 90,000 b/d, “mainly in distillates,” said Olivier Jakob at Petromatrix in Zug, Switzerland. That was “only a marginal adjustment” as that agency is now better at estimating and separating product exports and real domestic demand, he said.

Jakob also noted, “Ethanol production reached a new record high in August and increased Environmental Protection Agency blending requirements will continue to be a challenge for petroleum gasoline in the US.”

Meanwhile, the new “Alberta Clipper” pipeline from Canada started to make its first crude oil deliveries this month. “Combined with the Keystone pipeline that started this summer and the increased crude production in the Midwest, this should continue to put more localized pressure on West Texas Intermediate and be a pressure point on the time-spreads into 2011,” said Jakob.

Energy prices
The December contract for benchmark US sweet, light crudes increased 24¢ to $82.18/bbl Oct. 28 on the New York Mercantile Exchange. The January contract advanced 27¢ to $82.94/bbl. On the US spot market, WTI at Cushing, Okla., was up 24¢ to $82.18/bbl. Heating oil for November delivery inched up 0.52¢ to $2.24/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 1.19¢ to $2.11/gal.

The new front-month December contract for natural gas escalated 12.7¢ to $3.89/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.9¢ to $3.36/MMbtu.

In London, the December IPE contract for North Sea Brent increased 36¢ to $83.59/bbl. Gas oil for November gained $12 to $708/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was up 73¢ to $79.92/bbl.

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