MARKET WATCHLarge storage injection hammers natural gas futures price

Sam Fletcher
Senior Writer

HOUSTON, July 11 -- The August contract for natural gas plummeted 26.2¢, or 5%, to $5.26/Mcf Thursday on the New York Mercantile Exchange after the US Energy Information Administration reported yet another triple-digit injection of gas into underground storage.

IEA said Thursday that 111 bcf of gas was injected into US storage during the week ended July 4. That exceeded analysts' forecasts for the week, in which commercial and industrial demand for gas was reduced by the 4th of July holiday; it also was up from injections of 97 bcf the previous week and 67 bcf during the same period a year ago (OGJ Online, July 10). US natural gas storage now stands at 1.77 tcf, down 580 bcf from year-ago levels and 317 bcf below the 5-year average.

EIA has registered triple-digit injections in five of its last six weekly reports on US gas storage, including a record injection of 127 bcf during the week ended June 20. That prompted one analyst, in testimony before a US Senate committee Thursday, to dismiss warnings of a natural gas crisis, citing the apparent "gratuitous surplus" of supply.

However, in a weekly report Thursday, Robert S. Morris, Banc of America Securities LLC, New York, said, "Total US natural gas supply last month was down about 1.2 bcfd, on average, or 2% relative to the year-ago period. This includes an estimated 1.3 bcfd drop in (US) gas production and a 350 MMcfd decline in Canadian imports, partially offset by a 550 MMcfd uptick in LNG imports, while (US gas) exports to Mexico remained roughly flat."

John P. Herrlin Jr., first vice-president of Merrill Lynch Global Securities Research & Economics Group, New York, said Friday, "We have seen no significant increase in North American natural gas production and expect North American E&Ps to remain disciplined with respect to their capital spending plans" in the last half of 2003.

"With natural gas production down over 4% in 2002," he said, "we are forecasting an additional decline of about 1-2% in 2003, despite a 20% increase in the year-to-date average Baker Hughes (Inc.) natural gas rig count (and) contrary to EIA's forecast of 3% US production growth and the Alberta Energy & Utilities Board's 1.5% growth forecast for Alberta."

In testimony Thursday before the Senate Committee on Energy and Natural Resources, Federal Reserve Chairman Alan Greenspan reiterated earlier warnings of a pending natural gas crisis and said high natural gas prices would impact residential customers this winter (OGJ Online, July 10, 2003).

'Inconsistent' data
EIA's latest report of an injection increase "seems inconsistent, unless there was more-than-projected holiday-related reduced demand or the prior week's 97 bcf injection was aberrant," Morris said in a weekly report Thursday. He reiterated, "A clear picture has not yet emerged with regard to the true level of backed out demand."

Herrlin decried the market's "myopic fixation with the weekly natural gas inventory changes." He said, "We are in a sector that is dealing with statistical misinformation and near-term inaccuracies. (Wall) Street consensus estimates for natural gas storage injections have been off the mark and lower than reported injection rates in 10 of the last 12 weeks. With the potential to fuel-switch, the real question is, 'Why aren't injection rates higher than what is reported?'"

Injections of natural gas into US underground storage during June up averaged 4.3 bcfd more than during the same period last year. "Nearly 1 bcfd of the variance is due to cooler temperatures, since this past June was roughly 25% cooler than last year (and) about 34% cooler than the 10-year average," Morris said.

Moreover, he said, "Our models indicate that the majority of the estimated 4 bcfd of demand that can fuel-switch away from natural gas did so in early June, effectively increasing last month's injections by about 3.5 bcfd on average, relative to 1 year ago. However, we would expect to see some of this demand begin to return to natural gas now that it is cheaper than distillate on an energy equivalent basis in each of the key fuel-switching regions."

In addition, he estimated some 1.5 bcfd of industrial demand was backed out last month, including nearly 500 MMcfd at ammonia, methanol, and ethylene plants, which use natural gas as a feedstock.

"Meanwhile, 'reverse line pack,' or drawing down pipeline pressures that had built during May when there was an absence of any real weather-related demand, was also a significant contributor to the higher . . . pace of injections, in our opinion, adding about 1.5 bcfd. An important factor driving the reverse line pack was a strong economic incentive to inject gas into storage, given the spread between the current and outer-month (January 2004) NYMEX contract prices, which still exists," said Morris. "However, there is a limit to the amount of reverse line pack that can occur."

Oil prices
The August contract for benchmark US light, sweet crudes gained 18¢ to $31.06/bbl Thursday on NYMEX, while the September position advanced by 14¢ to $30.77/bbl. Unleaded gasoline for August delivery dropped 0.98¢ to 93.03¢/gal Thursday as the market adjusted its 3.55¢/gal jump to a 100-day high in the previous trading session. That earlier surge was triggered by refinery problems in Texas and California and the potential threat from Tropical Storm Claudette (OGJ Online, June 10, 2003). The August heating oil contract dipped by 0.01¢ Thursday to 80.46¢/gal.

In London, the August contract for North Sea Brent oil gained 17¢ to $28.88/bbl on the International Petroleum Exchange. The August natural gas contract inched up 0.3¢ to the equivalent of $2.76/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes gained 55¢ to $27.98/bbl Thursday.

Contact Sam Fletcher at [email protected]