MARKET WATCHExpiring near-month gas contract drops below $6/Mcf
Sam Fletcher
Senior Writer
HOUSTON, May 28 -- As the New York Mercantile Exchange resumed trading Tuesday after the long Memorial Day holiday, natural gas for June delivery plunged below $6/Mcf for the first time since mid-May, dropping 21.9¢ to $5.90/Mcf as moderate weather and weaker cash prices encouraged local distribution companies to liquidate, analysts at Enerfax Daily reported Wednesday.
"The June contract expires today," analysts said. "The last two front contracts, April and May, expired around $5.12-5.146(/Mcf), both showing weakness on expiration." Yet, they said, "Pricing remains about 78% higher than a year ago at this time, as total volumes in storage are 35% below the 5-year average and 44% below last year's level for the third week in May."
Gas market problems
For US gas storage to reach 2.8 tcf by winter, Enerfax analysts said, gas injections must exceed by 16% a 5-year average build of 73 bcf. "To get to 3 tcf, an average weekly injection of 84 bcf is needed," they said.
"It is clear that Washington, DC, is noticing the structural shortage of natural gas, demonstrated by high level meetings last week to discuss options and (Federal Reserve Chairman) Alan Greenspan's comments about the shortage and impact," said James K. Wicklund in a report Tuesday from the Houston office of Banc of America Securities, New York.
Wicklund warned, "If we get the hot summer and cold winter (combination) that analysts, investors, and oil companies normally hope for, natural gas prices could spike to levels that could severely crimp consumer spending, destroy more long-term demand than is needed or healthy, and possibly put the US into recession."
Moreover, he said, the timing for such a potential disaster "could not be worse, given that the election cycle picks up steam" later this year. Among options being discussed by politicians to attempt to control the gas market are price controls and rationing of gas supplies, he said.
"Price controls and rationing should be of last resort," advised Wicklund. "Price controls have never worked, and it would reduce the economic incentive to drill and produce more natural gas, which is the best option near-term to ease the crisis. Rationing would derail the free market system for natural gas and cause significant longer-term fundamental and economic problems for the industry."
Instead, Wicklund said, "The most likely option available to Washington is to lift coal emission levels to allow for more coal-fired electrical generation, freeing natural gas for storage." Such a move would not have "any negative fundamental impact" on the gas industry, he said, "as it demonstrates to even skeptics that higher levels of natural gas production are definitely needed and for some time. This is also demonstrated by the stop-gap efforts to ease the shortage near-term."
Oil prices
NYMEX futures trading in oil and petroleum products was primarily positive Tuesday, with the July contract for benchmark US light, sweet crudes up 19¢ to $29.35/bbl. The August position advanced by 14¢ to $28.39/bbl. Heating oil for June delivery inched up 0.2¢ to 74.6¢/gal. However, unleaded gasoline for the same month dropped 1.13¢ to 89.52¢/gal.
In London, the July contract for North Sea Brent oil lost 42¢ to $25.82/bbl Tuesday on the International Petroleum Exchange. The June natural gas contract was down 4.7¢ to the equivalent of $2.74/Mcf on IPE. That market also was closed Monday for a holiday.
The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes retreated by 39¢ to $26.48/bbl Tuesday.
Iraqi oil
The US Energy Information Administration on Tuesday quoted Thamir Ghadhban, Iraq's acting oil minister, as saying he expects Iraqi oil production to double within a month.
Ghadhban earlier reported that Iraqi oil production was set to rise "within weeks" to 1.5 million b/d from 235,000 b/d currently. Such production level would be enough to meet Iraq's domestic needs of around 500,000 b/d, leaving 1 million b/d to export (OGJ Online, May 6, 2003).
US and Iraqi officials reported that Iraq's two main export terminals, Mina al-Bakr in the south and the Turkish port of Ceyhan north of Iraq, are operational and ready to resume exports. The first post-war exports of Iraqi oil are expected to start in mid-June from storage tanks in Ceyhan. Close to 9 million bbl of Iraqi oil is stored at Ceyhan (OGJ Online, May 23, 2003).
Meanwhile, Abass Al Aani of Iraq's oil ministry, said a terminated pre-war with OAO Lukoil would not be reinstated. However, other agreements with Russian oil companies remain firm.
Ghadhban said Iraq's former deal with the Chinese Oil & Gas Exploration & Development Corp. (CNODC) to develop the Al-Ahdbad field has been suspended.
Contact Sam Fletcher at [email protected]