Sam Fletcher
Senior Writer
HOUSTON, Nov. 10 -- Energy futures prices rebounded Friday as colder weather moved into the Northeastern US, the world's largest heating oil market, with near-month contracts for crude and petroleum products essentially wiping out previous losses.
The December and January contracts for benchmark US light, sweet crudes climbed by 59¢ each to $30.85/bbl and $30.56/bbl, respectively, Friday on the New York Mercantile Exchange. On the cash spot market, West Texas Intermediate crude at Cushing, Okla., bounced back by 60¢ to $30.88/bbl. Unleaded gasoline for December delivery jumped by 1.89¢ to 83.31¢/gal Friday on NYMEX. Heating oil for the same month gained 1.36¢ to 83.58¢/gal.
Only natural gas failed to make a full recovery, with the December contract inching up by 4.8¢ to $4.71/Mcf Friday on NYMEX, after losing 23.9¢/Mcf Thursday. Gas futures prices were lifted by the firmer crude oil market, forecasts for cold weekend weather, and some technical buying, "despite a soft weekend cash (spot natural gas) market," said analysts Monday at Enerfax Daily.
Natural gas outlook
"Look for prices to remain volatile near-term with the rapid changes in weather, with warmer temperatures expected to follow the cold weekend, but another shot of arctic air is predicted later this week," said Enerfax analysts.
"Cash markets for gas continue to exhibit extraordinary price volatility," said Stephen A. Smith, founder and president of Stephen Smith Energy Associates, Natchez, Miss., in a separate report Monday. He noted that the Henry Hub natural gas cash spot market closed at $3.99/Mcf on Oct. 31, rebounded to $4.74/Mcf by Nov. 6 and dropped to $4.48/Mcf on Nov. 7. "The average Henry Hub price for the week [ended Nov. 7] was $4.36[/Mcf], down slightly from the $4.38[/Mcf] average for the week before," he said.
"More important than the gas price itself," said Smith, the price spread between natural gas and alternative residual oil "continued to narrow this past week and is now down to 23¢/MMbtu as compares with 75¢/MMbtu 8 weeks ago."
Based on his model, Smith expects the US Energy Information Administration later this week will report the addition of 37 bcf of natural gas into US underground storage during the week ended Oct. 7. That would boost total US gas storage to 3.19 tcf, or 190 bcf of "surplus" supply above the normal 3 tcf comfort level at the start of the winter demand season, vs. "close to a 400 bcf deficit" 6 months ago, he said.
EIA's recent adjustments of previously reported storage figures as a result of a change in its methodology (OGJ Online, Oct. 31, 2003) "explain only 38 bcf of this swing, and milder-than-normal fall weather accounts for another 100 bcf thus far," said Smith. "Summer weather was fairly close to normal, so this arithmetic suggests that supply has exceeded demand by roughly 450 bcf over the 6-month period."
The current surplus of natural gas vs. projected winter demand "is likely to build at 15-20 bcf/week on a weather-normalized basis until lower gas prices and the passage of time restore supply-demand balance," said Smith. "If weather is normal, we expect cash prices [for natural gas] to bottom in the $3.50-4[/Mcf] in January-February."
Gas production declines
However, the accelerating decline of US production means average natural gas prices "should stay within the $4.50-6.50/Mcf range" for "the next several quarters," said Wayne Andrews, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla.
The latest survey by Raymond James of the 46 largest producers of US natural gas indicates that gas production during the third quarter decreased by 3.1% from year-ago levels and by 1.5% from the second quarter of 2003. The company previously reported US gas production during the second quarter of this year fell by 2.4% from the same period in 2002 and by 0.8% from the first quarter of 2003.
"The decline rate actually appears to be accelerating," Andrews reported Monday, "despite the fact that record cash flows for E&P companies had funded a 30% increase in drilling since late last year."
He said, "Perhaps most importantly, the majors (and gas utilities) continue to show the biggest decline in US natural gas production, coming in this quarter at down 8.3% vs. last year and down 4%" from the second quarter of 2003. "This is important since the majors and gas utilities represent a major proportion of US gas supply, and drilling activity among the majors and gas utilities is essentially flat since the start of the year. This indicates that further production declines lie ahead for this group," Andrews said.
It also spotlights "an even more astonishing reality: The independents are driving nearly all of the drilling activity increases, with little production response to show for it," he said. "Specifically, the independents have been responsible for putting an additional 240 rigs to work (a 33% increase) since the start of the year, and their corresponding production results show only 2.4% year-to-year growth and 1.1% sequential growth." Although an improvement over the "mediocre" growth registered by this group in the second quarter, Andrews said, "It is still extremely low, compared [with] the independents' massive level of investment."
Andrews acknowledged, "While our survey covers approximately 56% of total US production, its results are not necessarily reflective of the other 44%, which largely consists of small 'mom-and-pop' E&P companies. It is probable that the production growth rate of these companies is closer to that of the large independents than the majors, but give the vast number of these small players, it is difficult to get an accurate assessment of what their production is doing."
Other energy prices
In London, the December contract for North Sea Brent oil gained 50¢ to $28.91/bbl Friday on the International Petroleum Exchange, wiping out the previous session's loss of 19¢/bbl. However, gas oil for November delivery continued to decline, down by $2 to $261/tonne. The December natural gas contract also continued its fall, down by 36.9¢ to the equivalent of $5.66/Mcf Friday on IPE.
The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes gained 46¢ to $28.30/bbl Friday. For the full week, however, that basket price averaged $27.30/bbl, down 48¢ from the previous week.
So far this year, OPEC's basket price has averaged $27.89/bbl. During the third quarter of this year, the basket price averaged $27.38/bbl—including averages of $28.54/bbl in October, $26.32/bbl in September, and $28.63/bbl in August—against a second quarter average of $25.85/bbl.
That compares with an average OPEC basket price of $24.36/bbl for all of 2002.
Contact Sam Fletcher at [email protected]
