MARKET WATCHNatural gas price sets new 7-month low

July 25, 2003
Technical trading factors dropped the natural gas futures price to a new 7-month low Thursday, but boosted prices for oil and petroleum products on the New York Mercantile Exchange.

Sam Fletcher
Senior Writer
HOUSTON, July 25 -- Technical trading factors dropped the natural gas futures price to a new 7-month low Thursday, but boosted prices for oil and petroleum products on the New York Mercantile Exchange.

The NYMEX natural gas market "opened up slightly and hit the high of the day early at $4.94(/Mcf), but quickly took a steep plunge as soon as the (weekly US gas) storage data was released and traded on both sides of $4.70(/Mcf) for the rest of the day, ending on the upswing," said analysts Friday at Enerfax Daily. The August gas contract closed at $4.73/Mcf Thursday, down 14.5¢ for the day.

Gas market factors
The US Energy Information Agency reported Thursday that injections of natural gas into US underground storage totaled 83 bcf during the week ended July 18. "Although the injection data was in the expected range, some traders were expecting Hurricane Claudette to have had a bigger impact (on natural gas supplies). Unless the weather gets hotter, the market fundamentally will be pressured lower," said Enerfax analysts.

However, Robert S. Morris, Banc of America Securities LLC, New York, noted that last week's gas injection rate was the "lowest since mid-May."

Ronald Barone, UBS Warburg LLC, New York, credited the lower injection rate to "production shut-ins caused by Claudette (estimated at roughly 8 bcf), a solid 4% increase in US electric output, and likely further fuel-switching to gas from oil, given improved (price) differentials." As of July 23, he said, "Natural gas prices were trading at a 18¢ discount to distillates at the New York hub and a 50¢ discount at the Gulf Coast hub."

Barone said, "While storage injections have maintained an overall brisk pace over the past several months, increasing the odds of the industry reaching adequate levels by Nov. 1, we would not be surprised to see this pace moderate in the weeks (and) months ahead."

After adjusting for the natural gas wells in the Gulf of Mexico that were temporarily shut in because of Hurricane Claudette, Morris said, the latest storage injection figure reflects about 6.5 bcfd of backed-out demand from year-ago levels. He questioned "whether some of the (recent) incremental demand due to fuel-switching back to natural gas from distillate, given the recent shift in pricing parity, is masking more industrial demand loss than previously deduced."

Gas sales to Mexico
Meanwhile, said Morris, exports of US natural gas to Mexico have increased during the last 4 months, hitting "an all-time high of 930 MMcfd in June, up 37%" from a year ago. "During the first 6 months of 2003, exports to Mexico increased roughly 50% to 720 MMcfd, on average, compared with 480 MMcfd, on average, during the same period last year," he said.

That trend "is not expected to be reversed anytime soon, with the Mexican Energy Ministry forecasting that Mexico will be a net importer of natural gas, of which the US is the only current source, through at least 2015," Morris said. "We expect US exports of natural gas to Mexico to be around 700 MMcfd to 1.2 bcfd over the next several years, although Mexican natural gas demand appears to be somewhat price sensitive. Exports to Mexico fell sharply in March when the Henry Hub spot natural gas prices exceeded $13/Mcf for a short period."

Over the long term, he said, "We believe Mexico's ability to attract foreign investment to unlock the potential of its natural gas-rich northern basins, combined with LNG imports, should help decrease Mexico's reliance on the US for a meaningful portion natural gas supply."

Canadian wells shut in
The Alberta Energy and Utility Board (AEUB) this week formalized its June proposal, effective Sept. 1, to shut in 938 gas wells producing from the Wabiskaw-McMurray formation in the Athabasca oil sands area to reduce the pressure decline in that geologic formation (OGJ Online, June 17,2003).

Final status of those wells, some of which are not currently producing, will be determined upon completion of a regional geological study by March 2004, Morris reported Thursday. Meanwhile, operators may file for exemptions with evidence that the gas they are producing is not in contact with bitumen reserves or that the bitumen deposits in the subject area are not commercially recoverable.

Current gas production from the Wabiskaw-McMurray formation in that area is 90 bcf/year, or 2%, of Alberta's annual gas output; the area holds 1 tcf, or 2%, of the province's remaining gas reserves, compared with an estimated 100 billion bbl of recoverable crude bitumen.

Even before AEUB's decision to shut in those wells, Morris said, Canadian gas production was expected to decline "at least 5% this year, subsequent to an estimated 2% drop in 2002."

Oil futures prices
The September contract for benchmark US light, sweet crudes climbed by 55¢ to $30.22/bbl Thursday on NYMEX, while the October contract rose 50¢ to $29.82/Mcf. Heating oil for August delivery jumped by 1.23¢ to 77.73¢/gal. Unleaded gasoline for the same month was up 0.25¢ to 89.83¢/gal.

In London, the September contract for North Sea Brent oil increased by 38¢ to $28.16/bbl on the International Petroleum Exchange. The August natural gas contract gained 2.8¢ to the equivalent of $2.77/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes rose 23¢ to $27.23/bbl Thursday.

Contact Sam Fletcher at [email protected]