Sam Fletcher
Senior Writer
HOUSTON, June 27 -- The futures price for natural plunged Thursday after the US Energy Information Administration reported a record injection of 127 bcf of gas into underground storage during the week ended June 20.
"Some analysts feel the sell-down broke the back of the bull market," the Enerfax Daily reported Friday. It reemphasized that, "with current high pricing and moderate temperatures, there is plenty of natural gas to buy," thereby "easing concerns about availability for next winter," said Enerfax analysts.
That's the second time this month that EIA has reported record injections. On June 12, it reported a record injection of 125 bcf for the week ended June 6, but subsequently reduced that figure to 114 bcf (OGJ Online, June 20, 2003).
Futures prices for oil and petroleum products also fell Thursday as traders decided they'd overreacted in running up prices Wednesday following reports of surprisingly sharp declines in US inventories of crude and refined products (OGJ Online, June 26, 2003).
Storage data doubted
The latest EIA report marked the 4th consecutive week that its tabulations of gas injections into US underground storage have exceeded 100 bcf. But that data "has everyone scratching their heads," said Robert S. Morris at Banc of America Securities LLC, New York.
Compared with earlier injection data, Morris said Friday, the latest report reflects "an additional 2 bcfd of backed out demand (and) 'reverse line pack,'" by which excess gas previously "packed" into pipelines is drawn down. He earlier estimated 40-75 bcf more gas can be packed into the US pipeline grid at maximum allowable pressure vs. the amount required for minimum operating pressure.
An incremental 2 bcfd of "just purely backed out demand," as major consumers reduce purchases of high-priced natural gas, would equals "nearly 10% of total US industrial plus electric generating consumption," said Morris. "We believe it is highly unlikely that nearly 10% of total domestic industrial/electric generating sector shut down last week."
Moreover, he said, "We have not yet observed any widespread warnings of low pipeline pressures as they are drawn down." Furthermore, said Morris, "Weighted temperatures last week were actually 13% warmer than the prior week, while nuclear generation of electricity dropped slightly. Thus, without any additional backed out demand (or) reverse line pack, this week's injection (report) should have been less than the prior week."
He said, "With regard to fuel switching, which is most often the highest component in backed out demand, the economic incentive to switch away from natural gas to fuel oil (or) distillates was less in every region of the US last week than during the first 2 weeks of June. Also, we believe that roughly 3.5 bcfd, or perhaps slightly more, of the total 4 bcfd of natural gas demand readily capable of fuel switching had already done so.
"In fact, we noted some slight switching back to natural gas in certain Gulf Coast regions over the past 2 weeks, given the narrowing spread between natural gas and oil prices. Thus, we do not believe that incremental fuel switching was a factor in the higher-than-expected storage injection figure reported this week," said Morris.
Market jitters
The natural gas market likely will remain jittery "until some clarity evolves with regard to the recent injections and the true level of backed out demand," as well as the price necessary "to effectively balance the market," Morris said. "Apart from a sharp drop in oil prices, we continue to believe that natural gas prices need to be well above historical levels to balance supply and demand."
Meanwhile, continued resistance to US-led coalition forces in Iraq still troubles world oil markets.
An Iraqi oil pipeline was reported on fire following an explosion Thursday at a site near Al-Sitha and the Tigris River. It was the sixth blast on Iraqi pipelines in the last 2 weeks, said Adal Al-Kazaz, director general of Iraq's Northern Oil Co.
An explosion Tuesday near the town of Barwanah also ignited an oil pipeline. An explosion Sunday damaged a natural gas pipeline near Hit in western Iraq, resulting in continued power outages in Baghdad.
The Iraqi oil ministry announced it would double to 6,000 the number of guards assigned to protect pipelines.
Energy prices
The August contract for benchmark US light, sweet crudes fell 94¢ to $29.01/bbl Thursday on the New York Mercantile Exchange, while the September position retreated by 79¢ to $28.55/bbl. Heating oil for July delivery plummeted 3.03¢ to 74.88¢/gal. Unleaded gasoline for the same month was down 2.28¢ to 83.32¢/gal.
Those losses diminished but did not eliminate gains from Wednesday's trading session.
The July natural gas contract plunged 46.6¢ to $5.29/Mcf Thursday on NYMEX. Nevertheless, said James L. Williams, president of WTRG Economics and publisher of Energy Economist Newsletter, "The market expectation is for natural gas to sell at a premium to crude on a (British thermal unit) basis for the next 12 months."
Williams noted, "There have been four times in the last decade when gas has sold at a premium to crude," including "the current period which has lasted 12 weeks. This is the first time it has extended past April."
He said, "There was one characteristic common to all four periods: Natural gas in storage was over 300 bcf below the norm for that time of year. The current storage report indicates that the storage deficit is now only 370 bcf and a considerable improvement from the record 661 bcf deficit at the beginning of March.
"Even if gas injections slow from the current record level, the storage deficit should drop to under 300 bcf in the next 3 weeks. With that level of storage, natural gas prices should fall below crude on a Btu basis. At the current price of crude, we expect gas prices to break below the $5(/Mcf) barrier by mid July," Williams said Friday.
In London, the August contract for North Sea Brent oil fell 61¢ to $27.04/bbl on the International Petroleum Exchange. The July natural gas contract, however, escalated by 7.3¢ to the equivalent of $2.86/Mcf Thursday on IPE.
The average price for the Organization of Petroleum Exporting Countries' basket of seven crudes inched up by 4¢ to $26.62/bbl Thursday.
Contact Sam Fletcher at [email protected]
