MARKET WATCH: Natural gas futures price drops below $4/MMbtu

March 26, 2010
The front-month natural gas contract fell 3%, settling below $4/MMbtu for the first time since September 2009 in the New York market after the government reported the first injection of gas into US underground storage this year.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 26 -- The front-month natural gas contract fell 3%, settling below $4/MMbtu for the first time since September 2009 in the New York market after the government reported the first injection of gas into US underground storage this year.

The Energy Information Administration reported the injection of 11 bcf of gas into US underground storage in the week ended Mar. 19, above the consensus estimate of a 9 bcf injection and likely signaling an early end of the winter withdrawal season.

“Natural gas had already dipped below $4 in anticipation of a 9 bcf injection before the EIA even reported its storage number,” said analysts at Pritchard Capital Partners LLC in New Orleans. “Weather forecasts continue to call for warmer-than-normal temperature over coming weeks, stifling hopes for a draw from underground storage as 2 more weeks still remain in the traditional withdrawal season.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The US is starting the building season with stocks towards the top of the recent range and natural gas prices are starting to break the support of $4/MMbtu.”

Oil prices were down slightly, with crude declining for the third straight session but still above $80/bbl at closing. The euro fell to a 10-month low against the dollar after Jean-Claude Trichet, president of the European Central Bank, said prior to a European Union summit in Brussels it would reflect negatively on Europe’s economic ability for the International Monetary Fund to resolve Greece’s sovereign debt. However, the euro rebounded later as Trichet toned down his criticism, said Pritchard Capital Partners.

In early trading Mar. 26, crude was up 1%, the dollar was down nearly 1%, and natural gas was “a hair under $4/Mcf,” said analysts in the Houston office of Raymond James & Associates Inc.

Jakob said crude trading on Mar. 26 was “likely to be dominated again by reaction to the EU plan for Greece. The EU has agreed to a face-saving solution, but it still leaves it to Germany to decide if in the end Greece deserves to be saved (unanimous vote is required) and requires the involvement of the IMF. The European cacophony is not over, and we do not see how the euro can be a safer haven than the dollar.”

Jakob noted, “Exogenous markets have been dominating the price formation of crude oil in recent weeks, but there is still no strong signal that the oil fundamentals have made a U-shape recovery. Rising oil prices and a rising dollar index [are] still a deadly mix for oil demand recovery. Yesterday the Cremona refinery in Italy (96,000 b/d) announced that it was shutting down for 1 month as it can not manage anymore its tanks being filled to the rim (Italy February gasoline demand was [down] 7.9% vs. last year, diesel [down] 1.2%). The flattening of the curve on Intercontinental Exchange gas oil is working against storage economics, but demand for storage needs to be replaced by demand for consumers and if the consumers are still absent, then oil will work its way back to storage; especially when refineries come back from their seasonal shutdown for maintenance.”

Jakob said, “We are coming to the end of the quarter, and the continued support on West Texas Intermediate at the start of the year price level is hiding in the broad commodity indices the disastrous returns of the other main commodities for the first quarter. A return of a backwardation would, of course, help the indices, and Goldman Sachs [Group Inc.] has called for a return of backwardation on crude oil. However, with ample stocks in the US Gulf [Coast area], what we have now is the opposite and a slight widening of the crude oil contango while the US Gulf cash differentials are moving further down.”

Energy prices
The May contract for benchmark US light, sweet crudes slipped 8¢ to $80.53/bbl Mar. 25 on the New York Mercantile Exchange. The June contract dipped 2¢ to $80.99/bbl. However, contract prices for subsequent months were up or unchanged and still in contango through at least March 2011. On the US spot market, WTI at Cushing, Okla., was down 33¢ to $80.03/bbl. Heating oil for April delivery declined 0.14¢ but closed essentially unchanged at $2.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 0.35¢ but closed essentially unchanged at $2.22/gal.

The April natural gas contract dropped 12.4¢ to $3.98/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 6.5¢, also closing at $3.98/MMbtu.

In London, the May IPE contract for North Sea Brent crude lost 1¢ to $79.61/bbl. Gas oil for April gained $3.50 to $664.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 13¢ to $77.03/bbl.

Contact Sam Fletcher at [email protected].