Market watch: Natural gas futures price falls as storage injections decline

With only a few days remaining in the pre-winter injection season for US natural gas supplies, gas futures prices fell Thursday following a government report of reduced injections last week.

Nov 1st, 2002

Sam Fletcher
OGJ Senior Writer

HOUSTON, Nov. 1 -- With only a few days remaining in the pre-winter injection season for US natural gas supplies, gas futures prices fell Thursday following a government report of reduced injections last week.

The December natural gas contract plunged 23.3¢ to $4.16/Mcf of the New York Mercantile Exchange after the US Energy Information Administration reported gas injections declined to 11 bcf in the week ended Oct. 25. That translates into 3.17 tcf of gas now in US storage (OGJ Online, Oct. 31, 2002).

Despite that sale down, "the winter natural gas market is much better looking than the bears would have believed a year ago. In fact, prices are almost double," said John P. Herrlin Jr., first vice-president of Merrill Lynch Global Securities Research & Economics Group.

"It's not to say that natural gas prices will be static, given the at-the-margin nature of the business," he observed. "But, hurricanes or not hurricanes, companies with US natural gas production haven't exactly knocked the leather off the ball."

With 28 of the 40 largest public producers of US gas reporting, indications are that third quarter production declined 1.5% from second quarter levels and are down 5.1% from the same period a year ago, said Robert Morris with Salomon Smith Barney Inc. in New York.

Herrlin estimates even higher decline rates of 1.6% and 6.1%, respectively. He said, "We believe that the market has already digested the information and gone on to the next thing—warmer weather forecast for next week. Such is the problem of having a physical commodity market focus on a futures market that must cope with a changing players universe and excess fiscal liquidity."

Meanwhile, meteorologists at Salomon Smith Barney are forecasting "a steady flow of arctic air southward into the mid-latitudes" through the first half of November, with temperatures below normal for most of the country and near record-low temperatures in the central US.

"For the first time since May, natural gas prices have risen above residual fuel oil prices on an energy equivalent basis," said Morris, who also pointed out, "many conventional gas-fired steam turbines can also burn residual fuel oil while combined-cycle plants can typically switch from natural gas to lighter distillates."

He said, "Power generators in the Northeast have indicated that they began to switch to residual oil from natural gas last week, where they have the capability and were not limited by contractual obligations." Such a decision "is based almost exclusively on relative prices," Morris said. "However, this week's injection figure does not indicate a significant level of fuel switching at this juncture."

Morris estimated fuel switching could reduce US demand for natural gas "by as much 4 bcfd, or about 7% of annual demand," if gas prices spike, relative to residual and distillate prices, for an extended period this winter.

"Also, the difference between natural gas and ethane prices has narrowed, and in certain regions it is now more economic to reject ethane rather than extract it as NGL," he said. "Based on conversations with several operators, we estimate that less than 10% of the natural gas processed is presently operating in a 'rejection' mode."

The decision to extract ethane or to leave it in the natural gas stream "is based solely on price differentials on an energy equivalent basis as incremental operating costs are minor," said Morris. "Importantly, ethane rejection increases the energy content of the natural gas stream and thus reduces demand on a volumetric basis. We estimate full-scale ethane rejection could result in a roughly 0.5% reduction in natural gas demand on a volumetric basis."

The December contract for benchmark US light, sweet crudes gained 41¢ to $27.22/bbl Thursday on NYMEX, while the January contract was up 32¢ to $26.88/bbl. Unleaded gasoline for November delivery jumped 3.52¢ to 86.35¢/gal. Heating oil for the same month rose 1.61¢ to 74.38¢/gal.

In London, North Sea Brent increased by 42¢ to $25.72/bbl on the International Petroleum Exchange. But the December natural gas contract plunged 14.2¢ to the equivalent of $3.79/Mcf on IPE.

The Organization of Petroleum Exporting Countries issued no report on the basket price for its oil, since OPEC offices were closed for a public holiday Thursday.

Contact Sam Fletcher at samf@ogjonline.com

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