For the first time in 6 weeks, the front-month natural gas futures contract fell below $6/MMbtu in interday trading Aug. 31 on the New York Mercantile Exchange, despite a "relatively bullish" lower-than-expected injection of 48 bcf of gas into US storage in the week ended Aug. 25.
The October gas contract closed at $6.05/MMbtu, down 24.2¢, after trading as low as $5.97/MMbtu. It dropped below the $6 mark again in early trading Sept. 1 as Tropical Storm Ernesto dissipated along the East Coast without seriously threatening offshore oil and gas production in the Gulf of Mexico.
The gas price also was pulled down by forecasts of moderate weather. "The warm weather trend came to an end this week as cooler air settled into several regions of the country, including the Northeast and Central US," said Ronald J. Barone, UBS Securities LLC, New York, in a Sept. 1 report. The cooling trend was predicted to persist in Ernesto's wake.
"Natural gas futures prices tumbled 26% in August, the biggest monthly drop since February. Prices are now 48% lower than a year ago," said analysts at Enerfax Daily.
Meanwhile, the gas injection number for the first full week of September "is historically a large injection due to Labor Day [US holiday], which causes decreased industrial demand," said analysts in the Houston office of Raymond James & Associates Inc.
Based on current storage balances, Raymond James analysts calculate an injection pace of 7.39 bcfd will get US storage to "a very solid comfort level" of 3.4 tcf by Nov. 1, the start of the winter heating season. "This could be considered bearish when compared with the 8.9 bcfd actual injection rate last year and the 9.38 bcfd 5-year average. However, as is highly evident in the 4 previous weeks (injections averaged 33 bcf vs. 53 bcf in the comparable 2005 period), natural gas consumption in the summer months has increased in recent years due to new gas-fueled generation capacity, while US gas production capacity has decreased. Moreover, peaking power generation facilities will burn natural gas this summer as (unlike the past few summers) gas is substantially less expensive than No. 2 oil," Raymond James analysts said.
Meanwhile, "a ramp up in Canada's gas-intensive oil sands industry, specifically in the province of Alberta, has significant implications for US gas imports," said Barone. He cited a Canadian Energy Research Institute study that estimated 17.3 tcf of gas would be required to produce oil sand reserves in Alberta over the next 15 years. That's "close to half of the 39.4 tcf of established reserves in Alberta," he said.
"As Canada's oil sands industry shifts into higher gears, imports to the US should continue to experience a marked decline. The Energy Information Agency, which is projecting a 1.9% annual growth rate in Canadian domestic gas consumption, predicts that by 2010 Canada's falling exports will be overtaken by LNG as the main source of US gas imports. Put into perspective, as recently as 2003 Canada supplied almost 90% of US net natural gas imports," he said.
Oil, gasoline markets
With the US summer driving season ending with the Sept. 4 Labor Day holiday, unleaded gasoline for September delivery dropped 5.15¢ to $1.75/gal Aug. 31 on NYMEX.
"The gasoline crack has collapsed . . . while heating oil has held some relative ground," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The spring rally [in crude prices] had been on expectations of strong product demand. The market has now lost the support of the products, and this outbreak in the relative values should be taken as a serious risk warning for the sustainability of crude oil above $70/bbl. If gasoline does not succeed in regaining some ground (in August 2006 the gasoline crack lost $14/bbl while it gained $14/bbl in August 2005) the current crude oil flat price will not have the necessary fuel for a further rally. But September is the end of the gasoline season, and the gasoline crack lost ground in September 5 years of the last 6," he said.
Crude futures prices continued to inch up, with the October contract closing at $70.26/bbl Aug. 31 as Iran defied the United Nation's deadline to stop its uranium enrichment program and Nigerian oil workers moved a day closer to their proposed 3-day strike scheduled for Sept. 13. Iran's snubbing of demands from the UN Security Council provoked no major reaction in energy markets "as the response (or lack thereof) was already expected and factored into prices. However, crude may rise if the UN proceeds with sanctions," said Raymond James analysts.
(Online Sept. 4, 2006; author's e-mail: [email protected])