MARKET WATCH: May natural gas futures drop below $4/MMbtu

The front-month natural gas contract fell 5% to below $4/MMbtu on Apr. 15 in the New York market after the government reported a bigger-than-expected injection of gas into US underground storage.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 16 -- The front-month natural gas contract fell 5% to below $4/MMbtu on Apr. 15 in the New York market after the government reported a bigger-than-expected injection of gas into US underground storage. The price of crude also slipped lower.

The Energy Information Administration reported the injection of 87 bcf of natural gas into US underground storage in the week ended Apr. 9, surpassing the Wall Street consensus for an 80 bcf increase. That brought working gas in storage to 1.8 tcf, “turning the storage deficit of 2 bcf into a storage surplus of 64 bcf” compared with the same period a year ago, said analysts in the Houston office of Raymond James & Associates Inc. US gas storage is now 246 bcf above the 5-year average (OGJ Online, Apr. 15, 2010).

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “We remain concerned that to get from current gas balances to ‘normal,’ prices may have to fall further to encourage more coal-to-gas switching or shut-ins of some marginal gas wells. This could require a period of pricing at $3.50/MMbtu or lower, in contrast to today’s price which, although down, is still hovering near $4/MMbtu.”

Raymond James analysts said, “Oil prices traded slightly down after a couple of government reports showing less-than-impressive economic data. Energy stocks shrugged off the lower commodity prices and rose slightly, trading alongside the broader market, which finished in positive territory.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The US weekly jobless numbers were worse than expected, but US equities continue to rise no matter what (when bad numbers are issued it is either due to the weather or to holiday distortions). Exogenous inputs will remain key for the next few trading days, but the weak relative values (wider contango) in oil are getting harder to ignore.”

Sieminski also noted, “After much speculation, China this week raised retail fuel prices, adhering to a price mechanism that was introduced early last year. The National Development and Reform Commission [of China], which is tasked with formulating economic policy including setting fuel prices, raised the ceiling for retail gasoline and diesel prices by 4-4.5% this week, the first price adjustments since November. Jet fuel prices were also raised by about 10%.”

Sieminski said, “The hike helps support [Chinese] refinery margins to keep up with crude oil price gains. The move also illustrates the central government’s commitment to supporting the refining industry, and the response from the industry will be to maintain high refinery run rates.”

Sieminski also noted the International Energy Agency in Paris recently increased its forecast of strong growth in oil production outside the Organization of Petroleum Exporting Countries in Russian, Brazil, the Caspian, China, India, and Colombia. “Even the more conservative forecasters are raising numbers. With North American output flat, and the North Sea down only about 250,000 b/d, the non-OPEC supply outlook looks likely to surprise to the upside in 2010,” Sieminski said.

Greece’s economic troubles will continue as a risk against economic recovery. “The risk with Greece is that the mud starts to hit the fan the day they trigger the rescue plan. The main technicalities of the plan might have been agreed to, but it will still need to get a unanimous vote from the European Union members, and the political pressure against the plan is so great in Germany that we can not take the vote as a done deal (the constitutionality of it is starting to be questioned),” Jakob said.

Energy prices
The May contract for benchmark US light, sweet crudes dropped 33¢ to $85.51/bbl Apr. 15 on the New York Mercantile Exchange. The June contract continued to climb, however, inching up 2¢ to $86.75/bbl. On the US spot market, WTI at Cushing, Okla., was down 33¢ to $85.51/bbl. Heating oil for May delivery increased 1.02¢ to $2.25/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 0.65¢, but its closing price essentially was unchanged at $2.33/gal.

The May natural gas contract fell 21.4¢ to $3.99/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 3¢ to $4.13/MMbtu.

In London, the May IPE contract for North Sea Brent crude rose $1.02 to $87.17/bbl. Gas oil for May increased by $1.25 to $715.75/tonne. “As WTI is moving to a deeper discount to Brent, the risk remains to see a reopening of arbitrage cargoes of distillates from the US Gulf [Coast] to Europe, which would in turn start to weigh on the gas oil spreads,” Jakob said. “The German consumer might be low on heating oil stocks for next winter, but at current prices he will not rush to replenish his tanks. Numbers released yesterday show German sales of heating oil down 41% vs. a year ago (down 32% for the first quarter). Gasoline sales in March were up 0.2% (down 4.6% in the first quarter) and diesel was up 3.9% (down 1.1% for the quarter).”

The average price for OPEC’s basket of 12 reference crudes gained 65¢ to $83.28/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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