MARKET WATCH: Natural gas falls 5% on bearish government report

Sam Fletcher
OGJ Senior Writer
HOUSTON, Mar. 19 -- The front-month natural gas contract fell 5% to within pennies of $4/MMbtu Mar. 18 in the New York market following a government report of a much lower-than-expected draw from US gas storage.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Natural gas suffered some heavy losses and is closing the gap to $4/MMbtu. The next large layer of support will not be until $3.70/MMbtu.”

The Energy Information Administration reported withdrawal of 11 bcf of gas from US underground storage in the week ended Mar. 12. That left 1.6 tcf of working gas in storage, down 40 bcf for the comparable period last year and 73 bcf above the 5-year average (OGJ Online, Mar. 18, 2010).

“The unusual drop in storage during early January has now been completely offset by very poor end-of-season draws. The gas business in the US is in desperate need of demand with very little prospect of it,” said Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC.

In Houston, analysts at Raymond James & Associates Inc. said, “Oil did not help energy's cause either, falling 1% after market speculation that the Federal Reserve may make a move toward tightening monetary policy, therefore pushing the dollar higher.” They said the gas price “clawed back a few cents” in early trading Mar. 19, with oil down less than 1%.

EIA previously reported commercial US crude inventories increased 1 million bbl to 344 million bbl that same week. Gasoline stocks dropped 1.7 million bbl to 227.3 million bbl. Distillate fuel inventories were down 1.5 million bbl to 148.1 million bbl (OGJ Online, Mar. 17, 2010).

However, Raymond James analysts noted an “interesting article” in the Mar. 19 edition of the Wall Street Journal indicating internal government reports exposed numerous errors over the past 3 years in oil inventory data supplied by the EIA, the statistical arm of the US Department of Energy. The article also cites antiquated technology and archaic statistical methods within the agency. EIA acknowledged “increasingly compromised” data and blamed budget cuts and a lack of funding for its inability to correct the problems.

OPEC quota intact
In other news, ministers of the Organization of Petroleum Exporting Countries meeting Mar. 17 in Vienna made no changes in the official 24.84 million bbl production quota set in December 2008 for the 11 members excluding Iraq (OGJ Online, Mar. 17, 2010). Saudi Arabia's Oil Minister Ali bin Ibrahim Al-Naimi said prior to the meeting current oil prices were “beautiful” and markets were happy.

“Despite our concerns for pricing in mid-2010, we have to admit that this view has nicely captured current trading sentiment,” said Sieminski. “Left unsaid at the meeting was what level of prices would be seen as ‘too high’ in view of the economy. Deutsche Bank’s economists believe that a triple-digit oil price would threaten the global recovery.”

He noted OPEC, EIA, and the International Energy Agency in Paris recently upgraded their individual predictions of global oil demand, with an average demand growth forecast of 1.3 million b/d this year. “Throwing a small pail of cold water on the flames, these same agencies also upgraded their forecasts for non-OPEC production. The 2010 growth estimates (that average 430,000 b/d) rose by more than 100,000 b/d from the March estimate,” Sieminski said.

“OPEC natural gas liquids in the major agency forecasts grow by an average of 630,000 b/d. This allows for a small rise in OPEC's crude oil market share in 2010 and likely previews better numbers for oil producers in 2011,” he said. “Ministers were happy enough about oil market balances that they agreed to skip a summer meeting and have set their next conference for Oct. 14 in Vienna. As long as prices stay above $70/bbl, we expect this decision to stick.”

However, Sieminski cited a “beautiful, happy” paradox: “If US dollar strength continues and monetary and fiscal stimulus is withdrawn, oil prices will likely suffer,” he said. “If oil prices (along with other commodities) continue to move strongly upward, it creates a paradox in our view concerning the negative impact this would have on the outlook for the economy, oil demand, and ultimately oil prices.”

Jakob said, “There has been some improvement in oil demand during 2009 but we need to always keep in mind that this improvement has been done in an environment of oil prices below $75/bbl if not below $70/bbl, and we continue to find it premature and adventurous to assume that crude above $85/bbl with a strong dollar would have a negligible impact on the sustainability of the oil demand recovery.”

But if higher oil prices reduce demand, he said, “They will also have a positive impact on oil supplies. The higher supply side is not only due to the evident incentive for OPEC to move into lower quota compliance but since oil is rising in a diverging trend to natural gas, there should also be some higher oil supply coming from oil-to-gas substitution and which will start to work its way against demand for petroleum-based feedstock.”

Energy prices
The April contract for benchmark US light, sweet crudes dropped 73¢ to $82.20/bbl Mar. 18, ending a 2-day rally on the New York Mercantile Exchange. The May contract decreased 67¢ to $82.54/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 73¢ to $82.20/bbl. Heating oil for April delivery declined 2.04¢ to $2.12/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month slipped 0.88¢ to $2.30/gal.

The April natural gas contract fell 21.8¢ to $4.09/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 3¢ to $4.21/MMbtu.

In London, the May IPE contract for North Sea Brent crude lost 48¢ to $81.48/bbl. Gas oil for April decreased $2 to $673.75/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped 35¢ to $77.90/bbl.
Contact Sam Fletcher at [email protected]