MARKET WATCH: Natural gas jumps 15% on New York futures market

The natural gas rally on the New York market surged past $3/MMbtu in a 15% gain Sept. 10, the largest 1-day jump in almost 5 years.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 11 -- The natural gas rally on the New York market surged past $3/MMbtu in a 15% gain Sept. 10, the largest 1-day jump in almost 5 years. Crude also climbed for the fourth consecutive session, briefly topping $72/bbl in its longest rally since late July.

The gas market shot up after the Energy Information Administration reported a slightly smaller-than-expected injection of 69 bcf of gas into US underground storage in the week ended Sept. 4. That boosted the working gas in storage to 3.4 tcf, up 495 bcf from the year-ago level and 503 bcf above the 5-year average (OGJ Online, Sept. 10, 2009).

In Houston, however, analysts at Raymond James & Associates Inc. reported, “While most economic indicators are pointing towards a quicker-than-expected rebound from the recession (and consequential snap-back in industrial demand), with 8 weeks left in injection season and storage levels already at…a record high for this time of year, it is hard to see yesterday's move as anything other than a technical rally. This effect was also likely amplified by the fact that most gas traders have been short October for many months and now need to unwind their positions. Given the 35% surge in [gas] prices over the last week, it will be interesting to see how the rest of the month plays out.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The gain was driven by short covering as shorts came to the realization that natural gas makes a seasonal low in September and tends to rally through the winter months. Technically looking at the chart, if the momentum in natural gas continues it appears that $4[/MMbtu] is the next resistance level.”

Another “bullish indicator” is that in the first and second quarters of this year, “89% and 96% [respectively] of all wells drilled were completed vs. an average of 85% the previous six quarters; we believe that the inventory of drilled but not completed wells is relatively insignificant at this time and the 1,900 uncompleted well inventory from fourth quarter 2008 has declined significantly,” said Pritchard Capital Partners.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “At the current rate of increase, we believe [gas] storage is nearly certain to exceed the all-time high of 3.565 tcf reached in late October 2007.” As a result, he said, “The strong rebound in US natural gas prices this week will be therefore be difficult to sustain.”

Weather affects gas market
Sieminski said the lack “of any named storms” in the Gulf of Mexico so far this year contributed to the previous poor performance of gas prices. “Hurricane activity has tended to have a more powerful and durable effect on natural gas price compared to crude oil. We believe this reflects the lack of strategic reserves in natural gas,” he said.

With the end of the US hurricane season imminent, attention is turning to the current El Nino effect. However, Sieminski warned, “One should treat the claim that El Nino will automatically result in a warm winter in the northern half of the US cautiously.” He noted, “The winters of 2002-03 and 2004-05 were weak to moderate Ninos, and both featured robust periods of cold in gas-sensitive areas of the Midwest and Eastern US. For the 2009-10 [winter], Deutsche Bank anticipates this El Nino to be on the ‘weak’ to ‘occasionally moderate’ scale through the December to February period, which combined with a weaker Pacific decadal oscillation (PDO), can lead to a much different outcome than just a mild winter. The 2002-03 winter was an extreme case in that El Niño combined with a positive PDO lead to one of the coldest winters this decade.”

Although he doesn’t anticipate a repetition of those events, Sieminski said, “The pattern is shaping up such that the ‘warm winter’ may be confined to the Pacific Northwest to the Northern Plains, making the East favorable for colder than normal conditions possible along the lines of [the winter of] 2004-05.”

Oil market outlook
In other trading, the euro hit a 9-month high Sept. 10 against the US dollar before retreating slightly, which helped push up crude prices.

EIA reported commercial US crude inventories fell 5.9 million bbl to 337.5 million bbl in the week ended Sept. 4. In the same period, US gasoline stocks increased 2.1 million bbl to 207.2 million bbl, and distillate fuel inventories were up 2 million bbl to 165.6 million bbl (OGJ Online, Sept. 10, 2009).

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “With high stock draws in crude oil and high builds in products, the [EIA] weekly report was an obvious mixed bag and the final blow for the product cracks.”

Jakob said, “US refinery runs are at the highs of the year, but with the recent plunge in the product cracks it is questionable as to how long they can maintain these levels. The problem is that, with the narrowing crude oil contango, they are also not getting paid to keep the crude oil in tank, so they might be left with no other choice than to process the crude stocks to capture the only economic still existing, and that is the heating oil contango. With the current narrowing of the US processing economics and of the crude oil contango, we would expect the US to reduce its crude oil import requirement through the erosion of the recent premium of West Texas Intermediate to [North Sea] Brent.”

Jakob observed, “US oil demand on the 4-week average is 378,000 b/d higher than a year ago, refineries are running only 48,000 b/d higher, and crude supplies are 700,000 b/d lower. This makes for an imbalance [that] is visible in the total US stocks that are showing a reduction of 5.1 million bbl. This is now the fourth consecutive week of material stock draws in total US petroleum stocks. Over the last 4 weeks, US stocks have been reduced by 25.5 million bbl, i.e. at a rhythm of [minus] 910,000 b/d.”

The EIA’s latest US inventory report and lack of production changes at the Sept. 10 meeting of ministers of the Organization of Petroleum Exporting Countries “proved to be non-events; confirmation that the direction of the dollar is still guiding the price of crude,” said Pritchard Capital analysts. “We remain bullish on oil given our expectation that the ‘call’ on OPEC rises by roughly 1.8 million b/d in 2010, which will take a big chunk out of their current spare capacity of 4 million b/d. We expect that non-OPEC producers will only be able to keep production flat in 2010 (at 55 million b/d).”

Energy prices
The October contract for benchmark US light, sweet crudes climbed as high as $72.44/bbl in intraday trade Sept. 10 before closing at $71.97/bbl, up 63¢ for the day on the New York Mercantile Exchange. The November contract increased 45¢ to $72.27/bbl. On the US spot market, WTI at Cushing, Okla., was up 63¢ to $71.94/bbl.

Heating oil for October delivery dipped 0.59¢ but remained virtually unchanged at an average $1.79/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dropped 2.45¢ to $1.80/gal.

The October natural gas contract shot up 42.7¢ to $3.26/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 4.5¢ to $2.68/MMbtu.

In London, the October IPE contract for North Sea Brent crude increased 3¢ to $69.86/bbl. Gas oil for September was unchanged at $570.25/tonne.

The average price for OPEC’s basket of 12 reference crudes gained 26¢ to $69.23/bbl on Sept. 10.

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