MARKET WATCHNatural gas falls below $5/Mcf with storage increase

Sam Fletcher
Senior Writer

HOUSTON, Aug. 15 -- Near-month natural gas futures prices again plunged below $5/Mcf Thursday on the New York Mercantile Exchange, after the US Energy Information Administration reported a larger-than-expected increase in US gas storage.

Falling natural gas prices pulled down oil futures prices in early trading on NYMEX. But oil and petroleum product prices rebounded because of tightening gasoline supplies just 2 weeks prior to the Sept. 1 US Labor Day holiday, analysts said.

Natural gas prices
The September natural gas contract dropped 28.8¢, or 6%, to $4.89/Mcf Thursday on NYMEX. Other months also registered losses, with October dropping 30.8¢ to $4.93/Mcf.

Gas futures prices tumbled lower as soon as EIA reported early Thursday that 82 bcf of gas was injected into US underground storage during the week ended Aug. 8 (OGJ Online, Aug. 14, 2003). The September contract bottomed out at the day's low of $4.79/Mcf by noon Thursday as traders ignored predictions of warmer weather and concerns about a Florida storm to snatch profits from the previous rally. As the price fell through previous support at $5/Mcf, it triggered a flood of long liquidation and technical selling, said analysts Friday at Enerfax Daily.

However, the electric power blackout late Thursday in several states from Connecticut to Michigan prompted limited buying that helped pull up natural gas futures prices, sources said.

Exactly 1 week earlier on Aug. 7, EIA's report of the smallest weekly gas storage injection in the last 3 months had pushed the near-month NYMEX gas futures price past $5/Mcf for the first time since July 21, with the September contract spiking 33.7¢ to $5.08/Mcf (OGJ Online, Aug. 8, 2003). EIA reported 74 bcf of natural gas was injected into US underground storage during the week ended Aug. 1.

Although gas injections into storage increased last week, that period was also "the first to reflect the impact of August bid-week prices, which favored natural gas over distillate fuel oil and provided an added incentive for operators to switch back to natural gas from distillate," said Robert S. Morris, Banc of America Securities LLC, New York.

"In fact, natural gas was $1.35/MMbtu, $1.21/MMbtu, and 98¢/MMbtu less expensive than distillate in the Gulf Coast, Southeast, and Northeast regions, respectively, during bid-week compared with July bid-week averages," Morris reported Thursday. "Thus, many (plant) operators made their fuel choices for the month of August in an environment that favored natural gas over distillate fuel oil to a greater extent than for July."

As a result, he said, "We estimate that roughly an additional 500 MMcfd of natural gas demand was recaptured last week. Overall, we estimate that the total amount of natural gas demand that has been recaptured via fuel switching from distillate since the end of June is at least 1.5 bcfd, perhaps slightly more." In addition, he said, "other industrial demand" has added "perhaps as much as" 500 MMcfd of recaptured natural gas markets.

Over the last 10 weeks, nearly 1 tcf of natural gas has been injected into US underground storage—"a record for the period and well above the 10-year average of 763 bcf," said Enerfax analysts. However, they said, total US gas inventories are still 16% below 2002 levels and 8% less than the 5-year average.

Recent second quarter reports by 40 of the largest publicly traded US natural gas producers indicate a drop in US gas production of 0.8%, compared with first quarter production, and 2% below year-ago levels, Morris said. "Overall, we continue to project that (US) natural gas production will drop nearly 1.5% this year," he said.

Moreover, Morris said, "We continue to project that Canadian (gas) imports (into the US market) will drop at least 5% in 2003, subsequent to a nearly 2% estimated decline last year (that) may prove conservative."

He said, "According to pipeline receipt data, second quarter Canadian natural gas production declined 4.2% compared with the corresponding period in 2002."

Gasoline prices
Unleaded gasoline for September delivery jumped by 2.79¢ to 97.83¢/gal Friday, wiping out losses from the previous session, as traders reacted to reports of large declines in US gasoline inventories and problems at a Canadian refinery.

Last week, US gasoline inventories plunged by 3.7 million bbl to 198.1 million bbl, "the lowest level since the week ending Nov. 22, 2002," EIA reported Wednesday (OGJ Online, Aug. 14, 2003).

The September contract for benchmark US light, sweet crudes gained 31¢ to $31.09/bbl Thursday on NYMEX, while the October position advanced by 23¢ to $31.03/bbl. September heating oil was up 0.68¢ to 81.38¢/gal.

The FOB cash spot market price for West Texas Intermediate crude for Thursday was unavailable because of the power blackout in the northeastern US.

In London, reports Wednesday of increased US crude inventories and Iraq's resumption of production from its northern oil fields (OGJ Online, Aug. 14, 2003) caused the September contract for North Sea Brent oil to lose 18¢ to $28.83/bbl Thursday on the International Petroleum Exchange. In addition, participants in that market have been rolling over their positions from the soon-to-be-expired September contract to October, adding to that market's bearish spirit, analysts said. Now that IPE has broken through the "psychologically important" support for $29/bbl, it is not clear where that market may stabilize, they said, "but the general trend is downwards."

The September natural gas contract lost 1.5¢ to the equivalent of $2.40/Mcf Thursday on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes dropped 59¢ to $28.02/bbl Thursday.

The group's basket price has been above its target of $22-28/bbl since Aug. 1, but OPEC Sec. Gen. Alvaro Silva Calderon claimed Thursday that is no reason for concern since speculation, rather than market fundamentals, is driving world oil prices. "As with all other issues, OPEC will carefully look at the situation and, if necessary, take appropriate measures," he said.

Oil supply and demand fundamentals appear to be balanced, with prices being affected by factors outside the market, said Silva Calderon. Because of such uncertainties, he said, OPEC adopted the strategy of more frequent meetings in order to maintain market stability. "In effect, the (OPEC) conference has already met five times this year to assess the market situation, and we will be meeting again in September," he said.

Contact Sam Fletcher at [email protected]