MARKET WATCH: Natural gas rallies as crude slips lower

Natural gas prices rallied Sept. 4 from a 7-year low in the previous session while the front-month crude contract posted a small gain on the New York Mercantile Exchange ahead of the Labor Day weekend that marked the end of a low-key summer driving season.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 8 -- Natural gas prices rallied Sept. 4 from a 7-year low in the previous session while the front-month crude contract posted a small gain on the New York Mercantile Exchange ahead of the Labor Day weekend that marked the end of a low-key summer driving season.

“Natural gas recovered all of [the Sept. 3] losses as investors realized that natural gas tends to make a seasonal low in September ahead of the start of the withdrawal season, and perhaps the 15-day 27% drop was slightly overdone. However, for the rally to sustain itself, the market needs to see greater evidence of a supply response from production declines, but past performance indicates September has always been a good time to buy natural gas,” said analysts at Pritchard Capital Partners LLC in New Orleans.

Bentek Energy LLC. reported Sept. 4 that May demand from its sample of chemical plants has increased 11%, or 84 MMcfd; demand from the primary metals plants in the firm’s sample has increased 78%, or 110 MMcfd. “This data confirms our belief that industrial demand will recover by 300-400 MMcfd in 2010. Combined with a 500 MMcfd increase in power sector demand and supply declines, we continue to believe our $6.50/Mcf NYMEX forecast looks reasonable,” Pritchard Capital Partners said.

Analysts in the Houston office of Raymond James & Associates Inc. said, “For well over 6 months, our gas models have been telling us that there would simply not be enough gas storage capacity to store all of the produced US natural gas through this summer. Over the past 2 weeks, the impending gas price debacle has finally become clear to the market, as several major pipelines carrying natural gas from producing regions to the Northeast have issued imbalance warnings. These imbalance warnings are a clear indication that the US is running out of gas storage capacity.”

They added, “As the situation worsens, pipelines start issuing critical storage days and operational flow orders (OFOs), which halt interruptible services and assess penalties for flows exceeding scheduled quantities. These OFOs are already beginning to appear and are a very bad sign for natural gas prices, given that we have an incredible 8-10 weeks left in injection season.” Raymond James said, “To put it bluntly, we're filling storage too fast, and gas producers will be forced to shut-in via lower (sub $2/Mcf) gas pricing over the next couple of months.”

Oil was up in early trading Sept. 8 with the Organization of Petroleum Exporting Countries ministers scheduled to meet Sept. 9 in Vienna. “Most analysts believe that OPEC will leave quotas unchanged. As a result, [official] production levels should remain at 25.845 million b/d,” said Raymond James analysts.

The OPEC meeting is scheduled for the evening because of the Muslim holy month. More important, it will be closed to non-OPEC producers. At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts reported, “Although OPEC delegates publicly say this is no big deal, it is difficult not to see this as a deliberate snub for non-OPEC producers' failure to take any concrete steps at all in support of their OPEC brethren's attempts to buoy oil prices. Russia, Azerbaijan, Egypt, Mexico, and Sudan have attended previous meetings but, despite talk at the time of cooperation from Russia and Azerbaijan, none of them has done a thing to support OPEC production cuts aimed at supporting oil prices. What galls as well as the broken promises is that Russia in particular is gaining market share and benefiting from the higher prices generated by OPEC's restraint.”

Raymond James analysts said, “Russia is now exporting more oil than Saudi Arabia. Russian export levels are up 5.9% year-over-year, and during the second quarter Russia exported approximately 400,000 more barrels a day than Saudi Arabia.”

KBC analysts also noted, “OPEC output appears to have increased slightly for a fourth consecutive month in August, rising to above 28.6 million b/d. This is due mainly to increased output from Nigeria, which indicates some improvement in the depth of disruptions to supplies from the Niger Delta. Combined output from the OPEC-11 totaled 26.2 million b/d, which is almost 1.4 million b/d over the target for the group implying a further drop in compliance, with agreed cuts of 4.2 million b/d, to below 70%.”

In other news, there were wire service reports Sept. 8 that Mexican President Felipe Calderon replaced Jesus Reyes Heroles as head of Petroleos Mexicanos (Pemex) with Juan Jose Suarez, a former banker.

Pritchard Capital Partners said, “This follows reports late last week that Mexico’s Energy Minister Georgina Kessel said that the country would have to reevaluate the strategy for Chicontepec moving forward given production shortfalls. The reports indicated that Chicontepec will produce 60,000 b/d by the end of this year vs. a previous forecast of 72,000 b/d. The delays from Pemex were widely expected and concerning in the short-term for oil service firms with exposure to Mexico due to potential penalties or delayed revenues. However, the long-term implications may incentivize the country to more aggressively expand efforts and thus potentially present a greater role for Western oil service firms.”

Energy prices
The October contract for benchmark US light, sweet crudes inched up 6¢ to $68.02/bbl Sept. 4 on NYMEX. The market was closed Sept. 7 for the US Labor Day holiday.

The November contract was unchanged at $68.55/bbl on Nov. 4. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 6¢ to $68.02/bbl. Heating oil for October declined 1.45¢ to $1.72/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month lost 1.65¢ to $1.78/gal.

The October natural gas contract climbed 22¢ to $2.73/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 12.5¢ to $1.92/MMbtu.

In London, the October IPE contract for North Sea Brent crude lost 30¢ to $66.82/bbl. Gas oil for September fell $10.25 to $538.50/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped 62¢ to $66.03/bbl on Sept. 4 but regained 12¢ to $66.15/bbl on Sept. 7.

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