MARKET WATCH: Gas, oil prices drop sharply

Natural gas fell Sept. 11, giving back half of the 15% price jump from the previous session that was the biggest 1-day increase in almost 5 years in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 14 -- Natural gas fell Sept. 11, giving back half of the 15% price jump from the previous session that was the biggest 1-day increase in almost 5 years in the New York market. Crude dropped below $70/bbl, ending a four-session rally, despite further weakening of the US dollar.

The sharp drop in gas prices may indicate that buying by investors to cover short positions is be over, said analysts at Pritchard Capital Partners LLC, New Orleans. However, they said, “Meaningful declines in natural gas supply from reduced production and higher demand should cause natural gas prices to spike in the first quarter of 2010.” Gas prices were reported up in early trading Sept. 14.

However, oil prices fell in early trading “over concerns that a strong economic recovery will not materialize and strengthen demand,” said analysts in the Houston office of Raymond James & Associates Inc. “Crude's price run-up since the start of the year now stands at 53%. Gasoline stockpiles rose…for the first time in 7 weeks, as the summer driving season came to a close. Also last week, the Obama administration began discussions of a $31.5 billion tax increase on oil and gas corporations to curb what the administration is calling ‘overinvestment’ in the industry.”

Pritchard Capital Partners noted the drop in crude prices occurred “despite positive news flow that China recorded its second highest level of net crude oil imports, up 18% to 17.92 million [tonnes].” They said, “Since crude did not react to a weaker dollar or positive Chinese data, two primary drivers this year, maybe better demand figures from the developed world are needed to drive crude through the $75 resistance.”

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “There are some very good signs from Asia that a strong economic recovery is under way.” They added, “The cloud in the sky is the recovery of Western export markets for Asian manufacturing industry, but it looks as if the G20 summit later this month will reiterate that governments will do what it takes to maintain the momentum behind recovery. Unfortunately the most obvious policy change—replace our Western governments with Asian governments—isn’t feasible.”

KBC analysts noted an “interesting development” during last week’s meeting in Vienna of ministers from the Organization of Petroleum Exporting Countries was “the fracturing of relations between OPEC and leading non-OPEC oil producers,” none of which were invited to the latest meeting.

In the past, representatives from Mexico, Norway, Oman, Russia, Kazakhstan, and Azerbaijan have attended OPEC meetings as observers and made “platitudinous speeches” pledging fraternal support, analysts said. However, they reported, “OPEC has noticed that these countries did not voluntarily cut one barrel of production in support of efforts to stabilize the market, although it could be argued that Mexico has ‘achieved’ more in terms of lower output [from rapidly depleting fields and lack of investment] than some of OPEC’s members. In future they won’t be invited to OPEC meetings.”

They also noted Venezuela’s oil minister skipped the OPEC meeting “to go with his boss to Moscow to sign various cooperation deals,” adding, “Russian energy influence is increasing along with its oil production, now back above that of Saudi Arabia.”

Electrical demand dropped
Raymond James analysts reported, “In the midst of the worst economic times since the Great Depression, US electric power generation this year has taken its largest hit in recorded history, tracking down a whopping 5% through June.” This decline “is twice as bad as any other year since World War II” and comes on the heels of “the third worst year since WW II (2008).”

The analysts said, “Although the weather is often to blame for large year-to-year swings in electric generation (as was the case in 2006), it's difficult to place much blame on the weather considering there were only about 2% fewer degree days through June, and residential and commercial-driven electric demand are only down 1% and 2%, respectively. Instead, atrocious industrial demand is the culprit, falling an incredible 13.6% through the first half of the year.”

Since these downward trends “are mainly being driven by relative pricing, not environmental concerns, the switching that helped gas demand this year may hurt it next year. Our current 2010 outlook for US natural gas calls for an average of $6/Mcf, up from an estimated 2009 average of around $4/Mcf.” Raymond James analysts said, “Assuming that US electric generation finishes this year down 3.7% (given easier comparisons during the second half of 2008) and rebounds by 1.5% next year, that means that natural gas demand from electric generation could actually fall by approximately 850 MMcfd in 2010 (excluding any effect from hydroelectric) in the face of a rebounding US economy.”

Energy prices
The October contract dropped $2.65 to $69.29/bbl Sept. 11 on the New York Mercantile Exchange. The November contract lost $2.55 to $69.72/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.65 to $69.29/bbl. Heating oil for October delivery fell 5.77¢ to $1.73/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month declined 4.38¢ to $1.76/gal.

The October contract for natural gas dropped 29.6¢ to $2.96/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., climbed 29.5¢ to $2.98/MMbtu.

In London, the October IPE contract for North Sea Brent lost $2.17 to $67.69/bbl. Gas oil for October was down $3.50 to $564.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes dropped $1.02 to $68.21/bbl Sept. 11. So far this year, OPEC’s basket price has averaged $55.86/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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