MARKET WATCHFalling oil futures prices pull down natural gas futures

June 25, 2003
Energy futures prices fell Tuesday, based on traders' expectations that government and industry reports this week will show a bearish build in US inventories of crude and petroleum products.

Sam Fletcher
Senior Writer

HOUSTON, June 25 -- Energy futures prices fell Tuesday, based on traders' expectations that government and industry reports this week will show a bearish build in US inventories of crude and petroleum products.

Falling oil prices pulled down natural gas futures prices on the cusp of the summer's first broad based heat wave in the Northeast and Midwest this week.

'Painful adjustment'
However, Wood Mackenzie Ltd., an Edinburgh-based consultant, said Tuesday that high natural gas prices should last for years in the US. "What is occurring now in the US energy market can be characterized as a painful period of adjustment as a commodity moves from relative abundance to relative scarcity," it said.

"We are not in a simple commodity cycle. High prices are likely to endure, and imports will continue to increase in share of the overall North American supply for natural gas," said Ed Kelly, head of North American gas and power consulting for Wood Mackenzie, in testimony to the US House Subcommittee on Energy and Mineral Resources.

He said, "Declines in (North American gas) production have occurred even as the US has built the next generation of power plants—with 217,000 Mw of new capacity added since 2000 on a base of 783,000 Mw—nearly all fueled by natural gas."

Natural gas prices will remain high until an import infrastructure is built, "capable of transporting large quantities of gas to the US," and new native sources of gas can be brought to market, said Kelly. However, he said, "These solutions are approximately 5-10 years away, meaning that gas is likely to remain expensive for at least the remainder of this decade."

LNG is an even more distant solution, Kelly said. "While increasing LNG imports are a near certainty, this growth should be put into perspective," he said. "Wood Mackenzie believes that it will be 10 years or more before LNG represents even 10% of US supplies on an annual basis."

Drilling is critical
"Before imports can increase substantially and before arctic gas can reach the market in large quantities (after 2010), US and Canadian drilling levels will largely determine supply on the margin or whether the gas price is closer to $3.50(/Mcf) or $5.50(/Mcf) in wholesale markets," said Kelly.

"Further restrictions on drilling activity will be accompanied increasingly quickly by higher real energy costs. Policymakers should be aware of the new cost trade-off between drilling and the environment," he advised.

Canadian production drops
Meanwhile, the Western Canadian Sedimentary Basin is suffering significant drops in production and in reserves added per well, along with accelerated decline rates, said members of the Canadian Association of Petroleum Producers at its 15th annual investment symposium this week in Calgary.

Proven reserves added per successful well drilled in Canada in 2002 were down 60% compared with 1998 levels, said Robert S. Morris, Banc of America Securities LLC, New York, in his report Thursday of the CAPP meeting. "Despite the perception that western Canada is less mature than the US, proven reserves added per successful well in the US have been greater than in Canada in each of the last 5 years," he said. "In fact, proven reserves added per well in the US last year were more than double" comparable Canadian reserve additions.

That is largely the result of "the recent focus in Canada on 'shallow' natural gas wells in an attempt to boost or sustain near-term production growth. Interestingly, companies noted that a large portion of the conventional natural gas resources in Canada's WCSB have been found and are in high decline (25-30%/year)," said Morris.

At that meeting, he said, "Several producers highlighted deeper horizons in the WCSB, frontier regions, coalbed methane, and other unconventional resources as potential areas for longer-term growth in Canada."

Morris also witnessed "renewed excitement over the proposed Mackenzie Valley natural gas pipeline, following the recent submission of a preliminary information package to regulatory authorities."

Energy prices
The August contract for benchmark US light, sweet crudes lost 39¢ to $28.78/bbl on the New York Mercantile Exchange, while the September position dropped 42¢ to $28.36/bbl. Unleaded gasoline for July delivery plunged 1.5¢ to 82.59¢/gal. Heating oil for the same month was down 0.57¢ to 74.47¢/gal.

The July natural gas contract dropped 16.6¢ to $5.70/Mcf on NYMEX. "Some traders were surprised that the market sold off with the heat rising," said analysts Wednesday at Enerfax Daily. However, forecasters generally expect the heat wave to be short-lived, with most regions moderating by the weekend. Tuesday's sell-off of the July gas contract, which expires Thursday, included some technical selling and profit taking, analysts said.

In London, the August contract for North Sea Brent oil lost 31¢ to $26.62/bbl on the International Petroleum Exchange. The July natural gas contract fell 5.4¢ to the equivalent of $2.82/Mcf on the IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes lost 28¢ to $26.26/bbl Tuesday.

Contact Sam Fletcher at [email protected]