MARKET WATCHReduced storage injection puts gas price past $5/Mcf

Sam Fletcher
Senior Writer

HOUSTON, Aug. 8 -- The report Thursday of the smallest weekly injection of natural gas into US storage in the last 3 months pushed gas futures prices past $5/Mcf on the New York Mercantile Exchange for the first time since July 21, pulling up prices for competitive fuel oil and other energy commodities in the process.

The September natural gas contract jumped by 33.7¢ to $5.08/Mcf on NYMEX, "driven higher by a bullish weekly inventory report and a flood of technical buying when key resistance was breached early in (Thursday's) session," analysts said Friday at Enerfax Daily. On July 21, the August gas contract closed at $5.11/Mcf on NYMEX, then plunged to $4.87/Mcf in the next session in the first of a consecutive series of 7-month low closings for a near-month contract.

The US Energy Information Administration reported Thursday that 74 bcf of natural gas was injected into US underground storage during the week ended Aug. 1 (OGJ Online, Aug. 7, 2003). That was down from 83 bcf the previous week, up from 33 bcf during the same time last year, and below Wall Street's consensus for the period. US natural gas storage now exceeds 2.1 tcf, but it is still down by 461 bcf from the same time a year ago and 234 bcf below the 5-year average.

Enerfax analysts reported, "Technical traders say the market's strong close above the down trend-line from early June (coupled with other factors such as breaking) the psychological $5(/Mcf) mark likely sets the stage for more upside" in gas market prices. But with US hot weather confined this week primarily to Texas and no Atlantic storms threatening natural gas production in the Gulf of Mexico, they said, "most traders expected only limited upside, noting fairly mild weather for the rest of the nation was likely to lead to decent storage gains for the next couple of weeks."

Switching to gas
However, Ronald Barone, UBS Warburg LLC, New York, said, "The low-end EIA report suggests that users with the ability to burn different fuels are continuing to switch to gas from oil. We believe this trend will persist, as Henry Hub August bid-week prices were $4.69/MMbtu vs. $5.30 in July and $5.95 in June."

The so-called "bid week" is usually the last 3 business days of each month when major customers with dual fuel capabilities decide the type and amount of fuel to purchase for the coming month. "(Plant) operators (last week) were making their fuel choices for the month of August in a (price) environment that favored natural gas over distillate fuel oil, and we believe that natural gas should continue to recapture some of the demand 'lost' to distillate over the previous few months," said Robert S. Morris, Banc of America Securities LLC, New York.

"Importantly, next week's (EIA report of gas storage injections during the first full week of August) should be the first to reflect the potential impact of August bid-week prices, although we believe some switching back to natural gas has already begun to occur," Morris said. The latest EIA report indicated lost or "backed-out" demand for gas amounting to 5.5 bcfd, down from 6 bcfd in the previous weekly report, he said.

"Given market dynamics thus far this week, we would expect a similar injection figure to be reported in the next storage report," Morris said Thursday.

Other energy prices
The price surge for natural gas futures also pulled along the competitive September heating oil contract, which shot up 2.05¢ to 85.45¢/gal. Unleaded gasoline for the same month gained 1.63¢ to 96.35¢/gal.

The September contract for benchmark US light, sweet crudes increased by 69¢ to $32.39/bbl on NYMEX, while the October position jumped ahead by 77¢ to $32.23/bbl. The bomb attack Thursday on the Jordan embassy in Baghdad that killed 11 people and wounded 50 also contributed to the rise in oil prices, signaling possibly more delays in full resumption of oil exports from Iraq, analysts said.

In London, the September contract for North Sea Brent oil jumped by 77¢ to $30.25/bbl on the International Petroleum Exchange. The September natural gas contract surged by 4.6¢ to the equivalent of $2.56/Mcf on IPE.

Industry sources Friday also reported oil price gains in Asian futures markets "during 3 of the 5 trading days" this week, primarily because of rebounding demand for petroleum products in that area and increased uncertainty over oil supplies as a result of recent terrorist attacks.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes increased by 19¢ to $29.07/bbl, marking the sixth consecutive trading day it has exceeded the group's targeted price band. OPEC's price band mechanism calls for members to adjust production quotas up or down by 500,000 b/d for each $1/bbl that the basket price remains above or below the group's targeted price level for 20 consecutive trading days.

Contact Sam Fletcher at [email protected]