MARKET WATCHEnergy futures prices rebound in oversold markets

Sam Fletcher
Senior Writer

HOUSTON, July 18 -- Energy futures prices rebounded Thursday as traders decided they'd overreacted to reports Wednesday of big builds in US gasoline and distillate inventories for the period ended July 11.

The August natural gas contract moved back above $5/Mcf on the New York Mercantile Exchange as traders shrugged off a report Thursday by the US Energy Information Administration that a total of 93 bcf of natural gas was injected into US underground storage last week.

That amount was less than the Wall Street consensus and down from injections of 111 bcf the previous week, but up from 69 bcf during the same period last year (OGJ Online, July 17, 2003). US natural gas storage now stands at 1.87 tcf, which is 556 bcf less than the year-ago level and down 300 bcf from the 5-year average.

Natural gas outlook
The more modest injection rate reported this week was the result of "overall hot temperatures, a subsequent 5% increase in US electric output, and continued relative narrowing in gas/crude spreads," said Ronald Barone, UBS Warburg LLC, New York.

"We expect a similar to slightly higher level of injection to be reported next week as—beyond cooler national temperatures—the counter influencing effects of (Hurricane) Claudette (including short-term supply disruptions and demand dampening regional precipitation) come into play. Moreover, the injection pace may continue to be tempered by fuel switching to gas from oil, given the continued relative narrowing in spreads vs. June levels," said Barone.

"The EIA defines 'full' (natural gas storage) as between 2.8-3.2 tcf, depending on the utility companies' determination of risk every year. And for 15 of the last 16 years, we have reached full storage. In 2001, we only reached 2.734 tcf, and natural gas prices spiked to $10/Mcf, a situation that negatively impacted all facets of the energy sector," said James K. Wicklund, an analyst in the Houston office of Banc of America Securities LLC.

"People who thought we would only get to 2.4-2.6 tcf in storage by the end of the (2003) season were. . .too low from the beginning," he said. "We need to inject between 20-30% more than the 5-year average to get to full storage, and we always get to full storage, so higher injections are a given."

However, Wicklund said, "The critical point of getting to full storage is what price is required to reach it. If we had reached full storage with $3/Mcf gas, we would be very concerned. Instead it has taken (natural gas prices in excess of) $6/Mcf to kill off enough demand for storage to fill."

In a weekly report Friday, Wicklund said, "Historically, gas prices trough in the summer months before trending up during the second half of the year. But in those years where storage peaks above 3 tcf, gas prices average 7% lower in the second half of the year than the annual average.

"Applying that scenario to this year, natural gas prices would still average approximately $5/Mcf for the second half of 2003, high enough for drilling activity to continue increases, and low enough to prevent any additional material demand destruction," he said.

Energy futures prices
The August natural gas contract gained 11.6¢ to $5.05/Mcf Thursday on NYMEX, "lifted by technical buying and short covering (buying to close out short sales) from an oversold market," said analysts Friday at Enerfax Daily.

"The market opened higher and traded steady until the EIA released the storage report, causing it dip to the (day's) low of $4.90(/Mcf) about noon, before steadily trekking higher all afternoon," said Enerfax analysts. "It was oversold and due for a technical bounce after losing about 11% in the five prior straight losing sessions."

The August contract for benchmark US light, sweet crudes increased by 36¢ to $31.41/bbl Thursday on NYMEX. The September position advanced by 31¢ to $30.72/bbl. Heating oil for August delivery rose 0.77¢ to 79.68¢/gal. Unleaded gasoline for the same month inched up by 0.05¢ to 89.07¢/gal.

Given the historically low levels of US inventories of crude and refined products, traders decided Thursday that "a few weeks of rising inventories would not make a lot of difference," analysts reported. The market remains vulnerable to any supply disruptions, and prices are likely to remain volatile in the near term, they said.

In London, the new near-month September contract for North Sea Brent gained 26¢ to $28.62/bbl Thursday on the International Petroleum Exchange. The August natural gas contract lost 0.49¢ to the equivalent of $2.69/Mcf on IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes gained 6¢ to $27.93/bbl Thursday.

Contact Sam Fletcher at [email protected]