MARKET WATCHHotter weather, reduced injections boost natural gas futures price

Sam Fletcher
Senior Writer

HOUSTON, June 20 -- The July natural gas contract shot up 36¢ to $5.94/Mcf Thursday on the New York Mercantile Exchange, driven by forecasts of warmer weather and a new government report that effectively reduced the record level of gas injection into US underground storage previously reported.

However, futures prices for crude and petroleum products continued to slip with reports of rising US inventories of oil and distillates (OGJ Online, June 19, 2003).

Gas market
The strong rebound of natural gas futures prices also was aided by "some afternoon technical buying" as the contract broke through resistance at certain price levels, said analysts Friday at Enerfax Daily.

"The weather is getting hotter, with some private forecasters expecting temperatures in New York to top 90° for several days next week," said Enerfax analysts. "Mild weather led to the record gains seen in the last three storage reports (by the US Energy Information Administration), but wider spreads to winter this month really boosted the pace of injections."

In its Thursday report, EIA noted the injection of 114 bcf of natural gas into underground storage during the week ended June 13 (OGJ Online, June 19, 2003). EIA reported that its previous report of a record 125 bcf injection during the week ended June 6 "included an 11 bcf reclassification of 'base' gas to 'working' gas storage and thus the true injection. . .was 114 bcf," said Robert S. Morris, an analyst with Banc of America Securities LLC, New York.

"'Working' gas is defined as the volume of gas in a storage facility that is available for withdrawals, while 'base' gas is the volume of gas needed as a permanent inventory to maintain adequate reservoir pressures and deliverability rates," said Morris. This, he said, "marks the first time a reclassification was included in the injection figure since the EIA took over the weekly survey in May 2002. Reclassifications of base gas to working gas are rare, but can occur as a result of the installation of new technology or engineering judgment regarding the amount of gas in place in the storage facility."

Morris claims recent large injections of natural gas into US underground storage are the result of "reverse line pack," in which "pipeline pressures continued to be drawn down while the economic incentive to inject remains in place given the spread between the current Henry Hub cash price and the outer-month NYMEX futures contract price."

However, Morris acknowledged, "Some incrementally more demand destruction, particularly with the start of a new month. In fact, we have seen a rash of shutdowns in the fertilizer industry. Natural gas accounts for 80-90% of the cost in manufacturing anhydrous ammonia, the key ingredient in nearly all nitrogen fertilizers and a significant component of phosphate fertilizers."

Production curtailments announced in recent weeks by six fertilizer companies have reduced natural gas demand by 400 MMcfd, relative to May, he said.

"At the same time, domestic ethylene producers are operating at near record-low operating rates. According to Chemical Market Associates Inc. (CMAI), domestic ethylene operating rates are expected to average around 77% in June, or nearly flat with May," said Morris. "Dow Chemical earlier this week announced the permanent closure of its 660,000 tonne/year Texas City, Tex., ethane cracker, 2 weeks ahead of its June 30 self-imposed deadline. A second Dow chemical cracker—the 440,000 tonne/year A unit at Seadrift, Tex. —is also scheduled to be shuttered by yearend. In addition, at least one unit along the Gulf coast is expected to be temporarily idled this month according to CMAI."

When operating at full capacity, the ethylene industry represents about 3% of total annual domestic natural gas consumption. "Apart from the ammonia and ethylene industries, incremental fuel-switching in power generation and by industrial users also appears to have reduced natural gas demand in recent weeks," Morris said.

With growing interest in LNG to supply the tight US gas market, Morris noted, "ExxonMobil (Corp.) said earlier this week that it is looking at Sabine Pass, Tex., as a potential location for its previously announced LNG receiving terminal in the US. ExxonMobil is an equity holder in Qatar's Rasgas and (Qatar Liquefied Gas Co.) liquefaction projects and, with over 500 tcf of proven reserves, Qatar has its sights set on becoming the world's leading LNG supplier."

Separately, he said, "Irving Oil (Ltd.) of Canada said that it is planning to move ahead with an environmental assessment for its proposed project to add LNG import capabilities at its Canaport LPG terminal in Saint John, NB. Irving Oil is targeting a 2006 start-up of the facility."

Other energy prices
The July contract for benchmark US light, sweet crudes dropped 40¢ to $29.96/bbl Thursday on NYMEX, while the August position retreated by 26¢ to $28.51/bbl. Unleaded gasoline for July delivery plunged 1.36¢ to 82.37¢/gal. Heating oil for the same month lost 1.08¢ to 73.4¢/gal.

In London, the August contract for North Sea Brent oil inched up 3¢ on the International Petroleum Exchange. Brokers said the market feared the latest in US oil inventories suggested that stocks are likely to continue rising by several million barrels over the next several weeks "because imports into the US have been high and are likely to remain so."

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes dropped 28¢ to $25.60/bbl Thursday.