Continued mild weather and a bearish report on US natural gas storage undermined the natural gas market in the week ended Jan. 13, with prices falling in all five daily sessions.
The February natural gas contract lost a total of 84.1¢ during the week to close at $8.79/MMbtu Jan. 13 on the New York Mercantile Exchange. That was the lowest closing price for a front-month natural gas contract since Aug. 9, when the September contract closed at $8.65/MMbtu. Ironically, it was in the following session on Aug. 10 that the front-month closed at $9.07, marking the first time since November 2004 that it had surpassed $9/MMbtu. It took 9 months for the front-month gas contract to break that barrier on NYMEX, but only a month to plunge by 55.7% from an all-time high of $15.78/MMbtu to less than $9/MMbtu again.
Ample gas supply
The US Energy Information Administration reported Jan. 12 the withdrawal of 20 bcf of natural gas from US underground storage during the week ended Jan. 6. That was below the consensus of Wall Street analysts and compared with an injection of 1 bcf the previous week and the withdrawal of 88 bcf during the same period a year ago. US gas storage stood at 2.6 tcf, down by 2 bcf from a year ago but 276 bcf above the 5-year average.
During that week, US temperatures “were 5% warmer than last year, 21% warmer than the 10-year average, and 2% cooler than the prior week,” said Robert S. Morris at Banc of America Securities LLC, New York. “Winter-to-date temperatures have been 1.6% warmer than the 10-year average.”
Morris said, “We believe the lower-than-expected withdrawal more likely reflects the still-strong economic incentive to inject gas into storage at the start of last week combined with minimal heating demand, rather than any significant increase in the level of ‘backed-out’ demand, especially given the continued drop in natural gas prices.”
Morris added: “Although natural gas prices have been cheaper than distillate (No. 2) fuel oil in each of the key fuel-switching regions for the last 2 weeks, it appears that most users began switching back to natural gas just this week in order to first deplete distillate inventories. At the same time, natural gas prices are now approaching the cheaper residual (No. 6) fuel oil prices along the Gulf Coast, which could provide some support for natural gas prices relative to oil prices. We estimate that total fuel-switching capacity in each of the three key fuel switching regions is 4 bcfd, almost equally split between distillate and residual fuel oil.”
Lost production
The US Minerals Management Service said 1.8 bcfd of natural gas from federal leases in the Gulf of Mexico, or 8% of the gulf’s total gas output, remained shut-in as of Jan. 11, down slightly from 1.88 bcfd the previous week. Cumulative production lost Aug. 26-Jan. 11 because of damage inflicted last summer by Hurricanes Katrina and Rita was estimated at 585.3 bcf of natural gas production, or 16% of annual output from federal waters in the gulf. MMS expects a slow but consistent restoration of gas production in the gulf, with shut-in gas falling to 1.5 bcfd in January, 1 bcfd in February, and 700 MMcfd in March.
“Despite the fact that substantial amounts of production have been restored, Hurricanes Katrina and Rita will have a continuing impact on production,” said Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York.
“We estimate that up to 1 bcf/d of production will be plugged and abandoned and, thus, lost,” Barone reported Jan. 13. He noted industry estimates that 134 contracted rigs, or 30% of the gulf rig fleet, are doing remedial or restoration work.
“To the extent these rigs are not drilling new productive wells, it will impact gulf production as the decline rate in the region approximates 35%,” Barone said. “To put it another way, pre-Rita and Katrina, the gulf was producing 10 bcfd, and 3.5 bcfd of new production had to come on line each year to maintain flat production. The industry has been unable to offset their steep decline curve as Gulf of Mexico production had declined 2 bcfd since 2003. With around 30% of the rigs performing remedial work, the rate of decline is likely to accelerate.”
Meanwhile, crude futures prices temporarily topped $65/bbl in intraday trade Jan. 12 on the New York market amid concerns over civil unrest in Nigeria and Iran’s nuclear program.
(Online Jan. 16, 2006; author’s e-mail: [email protected])
