MARKET WATCHDecember injection cuts natural gas price

Jan. 6, 2006
Natural gas futures prices plunged Jan. 5 with the first ever report of a December injection of natural gas into US storage.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 6 -- Natural gas futures prices continued to plunge Jan. 5 with the first ever report of a December injection of natural gas into US storage.

The US Energy Information Administration said Jan. 5 that 1 bcf of natural gas was injected into US underground storage in the week ended Dec. 30, compared to draws of 162 bcf the previous week and 151 bcf during the same period in 2004 (OGJ Online, Jan. 5, 2006). That boosted gas storage to 2.6 tcf.

"We believe this week's unprecedented injection (assuming it is not revised) more likely reflects the large economic incentive to inject natural gas during a week with minimal heating demand . . . rather than any significant increase in the level of 'backed-out' demand, especially given the substantial drop in natural gas prices in recent weeks," said Robert S. Morris at Banc of America Securities LLC, New York. He earlier reported US temperatures last week "were roughly 32% warmer than last year, roughly 34% warmer than the 10-year average, and almost 34% warmer than the prior week."

Other market factors included holiday-related shutdowns of industrial and business customers and "the mandated drawdown of pipeline pressures (i.e., 'reverse line pack') on certain lines such as Questar [Corp.]'s Southern system, which issued an open-flow-order," Morris said.

Strong gasoline demand
Meanwhile, US gasoline demand has reached its highest level since the August peak, while inventories remain tight, particularly on the East Coast, said Paul Horsnell of Barclays Capital Inc., London.

"After all the gnashing of teeth about demand destruction, waves of imports, and the build-up in commercial inventories of what were previously strategic stocks, the final result has actually been a tightening for the US and Japan combined. Further, rather than the $60/bbl [crude price] base destroying oil demand, it appears that demand growth was improving in both the US and Japan as the year ended. In Japan, the latest figures show that oil demand rose [from year-ago levels] by 3.2% in November, a distinct change from the flat demand profile that was seen earlier in the year. Cold weather and a strengthening economy seem to have kept that strength going through December," Horsnell said.

EIA reported Jan. 5 that commercial US crude inventories declined by 1 million bbl to 321.6 million bbl in the last week of December. Gasoline stocks gained 1.4 million bbl to 204.3 million bbl, and distillate fuel inventories rose by 2.1 million bbl to 128.9 million bbl.

Petroleum product inventories "typically rise the last week of the year due to the slowdown of work commuting, and since demand remains strong, we maintain our positive outlook on the refining sector and expect that refining margins will be supported by falling inventories," said Jacques Rousseau at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va.

Total US demand for refined products "increased by 2.5% in 2005, while total supply rose only 2.3%, with a massive increase in imports (up 15% year-over-year) helping to offset the impact of the hurricanes on production volumes," Rousseau reported Jan. 5. "For 2006, if we assume the 5-year average demand growth rate of 1.8% (300,000 b/d), given the limited amount of new supply we expect (280,000 b/d, assuming utilization rates rise to the 5-year average), in order to prevent a material decline in inventories, imports will have to rise from this year's record high levels, which suggests higher US margins are necessary to attract increased shipments from abroad."

Imports of crude into the US declined by 131,000 b/d to 10.1 million b/d in the latest period, said EIA, but input of crude into US refineries increased by 155,000 b/d to 15.2 million b/d, with units operating at 89.9% of capacity.

In an updated assessment of global refining capacity issued Jan. 6, Friedman, Billings, Ramsey & Co. said: "While information shows an acceleration to downstream investments, due to the amount of time needed to build a new refinery and rising demand, we do not anticipate a reduction in refinery utilization rates until 2009. As such, we expect refining margins and crude oil prices to remain strong, with our forecast calling for a $58/bbl average price [for benchmark US crude] in 2006 and $54/bbl in 2007. Our long-term assumption used in our valuation analysis remains $50/bbl."

As for US supplies of crude and natural gas, the Minerals Management Service said Jan. 5 that 101 production platforms remain idle on federal leases in the Gulf of Mexico as a result of damage inflicted along the Gulf Coast by Hurricanes Katrina and Rita. It said 403,861 b/d of crude and 1.9 bcfd of natural gas production remains shut in. Cumulative production lost from those leases since Aug. 26 totaled 111.6 million bbl of crude and 574.2 bcf of natural gas. That's equivalent to 20.4% of the crude and 15.7% of the natural gas previously produced annually from those waters.

Energy prices
The February natural gas contract closed at $9.50/MMbtu Jan. 5, down 69.8¢ after trading as low as $9.39/MMbtu during that session on the New York Mercantile Exchange. In less than a month, the price for the front-month natural gas contract has plunged from a high of $15.78/MMbtu on Dec. 13 to the lowest price level since Aug. 19, 2005.

Heating oil for February delivery lost 2.96¢ to $1.79/gal on NYMEX, while gasoline for the same month inched up by 0.25¢ to the same $1.79/gal closing.

The falling natural gas market also pulled down crude prices. The February contract for benchmark US light, sweet crudes dropped 63¢ to $62.79/bbl Jan. 5 on NYMEX. The March contract lost 61¢ to $63.59/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by 63¢ to $62.80/bbl.

In London, the February contact for North Sea Brent crude declined by 55¢ to $61.13/bbl on the International Petroleum Exchange. However, gas oil for January delivery was up by $1.75 to $536.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by 23¢ to $56.61/bbl on Jan. 5.

Contact Sam Fletcher at [email protected].