MARKET WATCH: Gas futures price continues to soar

Natural gas continued its amazing escalation, with the front-month October contract up 44¢ to $3.76/MMbtu Sept. 16 in the New York market despite record levels US underground storage and weeks left for more gas injection before the start of the winter heating season.

Sep 17th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 17 -- Natural gas continued its amazing escalation, with the front-month October contract up 44¢ to $3.76/MMbtu Sept. 16 in the New York market despite record levels US underground storage and weeks left for more gas injection before the start of the winter heating season.

Crude climbed above $72/bbl after the US Department of Energy issued a bullish report of a larger-than-expected drop in US oil inventories. “Nearly everyone is confused…as gas prices are now at the same level as in mid-March,” said analysts in the Houston office of Raymond James & Associates Inc. “Something fishy is going on.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The 56% jump in [gas] prices over the last nine trading sessions [up from a 7-year low of $2.41/MMbtu on Sept. 4] may be attributed to short covering, as short positions outnumbered long positions by 170,000 contracts the week ended Sept. 8 and have since dropped over the past 2 weeks. Fundamentally, yesterday’s trading was positively influenced by US industrial production rising for the second straight month in August (0.8% vs. a 0.6% forecast), which bodes well for industrial consumption which is down 13% year-over-year through June.” They warned a short-term correction may be lurking, however.

Analysts at Energy Solutions Inc., Verona, Wis., said, “We believe the rally is primarily technically driven by a number of factors—none of which have anything to do with fundamentals. First, Goldman Sachs [Group Inc.] recently predicted that natural gas prices will triple by this winter while a speaker at a Barclays [Capital Inc.] energy conference said natural gas is the ‘trade of the year.’ Comments such as these will attract investors into natural gas commodities.”

The analysts continued, “Second, CME Group [the world's largest and most diverse derivatives marketplace] announced much more aggressive position limits on futures contracts, and this may have prompted some short-covering. Third, 1 day prior to starting the rollover from October to November, United States Natural Gas Fund (UNG) announced that it will begin issuing new shares later this month. When UNG shares are purchased, the underlying natural gas futures contract must be purchased. This purchasing causes a surge of buying, which will send prices higher and therefore, some players that were short may have decided to cover their positions sooner rather than later.”

They added, “Lastly, as prices rallied, stops were hit, and prices moved even higher.”

US inventories
DOE’s Energy Information Administration reported the injection of 66 bcf of natural gas into US underground storage in the week ended Sept. 11. That boosted working gas in storage to 3.458 tcf, up 496 bcf from year-ago levels and 487 bcf above the 5-year average.

Earlier EIA said commercial US crude inventories fell 4.7 million bbl to 332.8 million bbl in the week ended Sept. 11. That exceeded the Wall Street consensus for a 2.5 million bbl decline and totally contradicted the American Petroleum Institute’s earlier bearish report of a 7.1 million bbl jump in crude. Gasoline stocks increased 500,000 bbl to 207.7 million bbl in the same period. Distillate fuel inventories gained 2.2 million bbl to 167.8 bbl (OGJ Online, Sept. 16, 2009).

Olivier Jakob at Petromatrix, Zug, Switzerland, noted, “API reported a crude oil stock draw in the Midwest but the size of it is even greater in the DOE report (3.9 million bbl) with most of the draw in the key Cushing[, Okla.] Hub. This makes for a relative low stock-to-capacity ratio in Cushing and should keep support on the front West Texas Independent spreads since independently of the world supply and demand it leaves room for an expiry play on crude oil.”

The Sept. 10 disruption of Canadian crude supply because of a power failure on the Enbridge pipeline occurred too late to explain the reported draws in the Midwest last week, said Jakob. “On the other hand, the end-of-the week reduction of flows on the Enbridge system could lead to further Midwest crude draws in the report of next week,” he said.

Product cracks managed to rebound Sept. 16 but are still to low to justify running a refinery, Jakob said. “With the current narrow contango on WTI and the poor returns of the product cracks, we continue to believe that the optimal plan for a US refiner is to transform what is left in the crude tanks into the heating oil contango and then shut the plant for a long winter holiday,” he said.

Pritchard Capital Partners said, “Crude prices have been range-bound for nearly 18-weeks at $60-75/bbl, and while crude stocks have fallen 11% from its 375 million bbl high in early May, reserves remain 9% above their 5-year average. Until stockpiles decline and demand for gasoline and distillate products increases, indicative of an economic recovery, crude will struggle to break through $75/bbl resistance.”

In other news, the US dollar fell Sept. 16 to its lowest level against the euro since late September 2008.

The US Department of Labor said initial claims for unemployment benefits declined to 545,000 last week from an upwardly revised 557,000 the previous week. That’s the smallest weekly number of initial claims since early July. However, the total number of people receiving unemployment benefits climbed to 6.2 million.

The US Department of Commerce said housing starts increased 1.5% in August to an annual rate of 598,000 units, the highest level in 9 months.

Energy prices
The October contract for benchmark US sweet, light crudes climbed $1.58 to $72.51/bbl Sept. 16 on the New York Mercantile Exchange. The November contract increased $1.57 to $72.87/bbl. On the US spot market, WTI at Cushing was up $1.58 to $72.51/bbl. Heating oil for October delivery gained 4.57¢ to $1.83/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month climbed 5.91¢ to $1.84/gal. Natural gas at Henry Hub, La., was up 1¢ to $3.28/MMbtu.

In London, the new front-month November IPE contract for North Sea Brent crude advanced $1.81 to $71.67/bbl. Gas oil for October gained $10.50 to $562.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased $1.74 to $68.69/bbl on Sept. 16.

Contact Sam Fletcher at samf@ogjonline.com.

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