Crude, gas markets seesaw

Feb. 6, 2006
Crude and natural gas futures prices peaked in intraday trading Feb. 1 at their highest levels in weeks before spiraling down among mixed market signals.

Sam Fletcher
Senior Writer

Crude and natural gas futures prices peaked in intraday trading Feb. 1 at their highest levels in weeks before spiraling down among mixed market signals.

The March natural gas contract traded as high as $9.83/MMbtu on the New York Mercantile Exchange before forecasts of more moderate weather spurred a steep slide for natural gas and heating oil. The March contract for benchmark US light, sweet crudes topped out at $69/bbl in NYMEX intraday trading Feb. 1 but fell to a $64.68/bbl closing Feb. 2, when gas finished at $8.35/MMbtu.

Despite a sharp drop since December, natural gas is still so expensive that it is shutting down US fertilizer plants. "Producers in this gas-intensive sector are almost powerless to control production costs as gas prices rise or plan for future production when prices are unpredictable. Exposure to gas prices is so high that shutting down production, oftentimes, is the safest hedging strategy," said Ronald J. Barone at UBS Securities LLC, New York. "Although the price at which fertilizer companies turn off production may differ, volatile gas prices make them all hesitant to build excess fertilizer inventories, even when high demand for fertilizer in the spring planting season is just around the corner," he said (OGJ Online, Feb. 3, 2006).

Energy inventories
The Energy Information Administration reported withdrawal of 88 bcf of natural gas from US underground storage during the week ended Jan. 27. That left 2.4 tcf of gas in storage, 296 bcf more than year-ago levels and 529 bcf above the 5-year average.

The 2005 average cost of natural gas in storage was $10.89/MMbtu, up 52% from 2004 storage costs, said Ziff Energy Group, Calgary. "The value of gas injected represents 83% of the total value of gas in storage, the carrying cost is 11%, and the service fee represents 6%. The cost of storage services can significantly influence what customers pay for gas, both at the wellhead and at the city gate," said Ziff analysts.

"The unusually high natural gas cost provides challenges for new gas storage developers as the cost of base gas is very significant in today's environment. The gas industry is willing to invest in gas storage because it provides considerable value in terms of increased efficiency, greater reliability of service, and facilitates market growth."

EIA said US inventories of crude increased by 1.9 million bbl to 321 million bbl in the week ended Jan. 27. US gasoline stocks jumped by 4.2 million bbl to 219 million bbl, while distillate fuel inventories dipped by 200,000 bbl to 136.3 million bbl. Imports of crude into the US increased by 339,000 b/d to 9.6 million b/d in that period. Input of crude into US refineries was up by 42,000 b/d to 14.7 million b/d with refineries operating at 87% of capacity.

"Get ready for more [refinery] downtime and lower production," warned Jacques Rousseau at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va. "Over the past several weeks, we have been predicting above-average levels of industry downtime during the first half of 2006 due to the deferral of normal maintenance operations after last year's hurricanes and the completion of ultra low-sulfur diesel upgrades."

Gulf Coast update
US Gulf Coast oil and gas operations are still recovering from the damage inflicted in August and September by Hurricanes Katrina and Rita. Officials at the US Department of Energy reported all crude and petroleum product pipelines affected by the hurricanes were back to normal operations by the end of January.

BP PLC estimated its 446,400 b/d Texas City, Tex., refinery, damaged by both Rita and an earlier explosion, will restart by the end of March. Murphy Oil Corp.'s 120,000 b/d Meraux, La., facility is expected to resume operations, also by the end of March. ConocoPhillips restarted some units at its 247,000 b/d Belle Chasse, La, refinery.

On Jan. 26, the Louisiana Department of Natural Resources said 79,109 b/d, or 39%, of South Louisiana onshore crude production capacity remains shut in as does 612.5 MMcfd, or 27% of natural gas production. A small number of gas processing plants in Louisiana with an aggregate capacity of 3.25 bcfd are still not operational.

US drilling activity hit the highest level in 20 years with 1,513 rotary rigs working in the week ended Feb. 3. That's 26 more than the previous week and up from 1,248 at the same time a year ago, said Baker Hughes Inc. It was the highest weekly rig count reported since Jan. 31, 1986, when 1,594 rigs were drilling in the US.

(Online Feb. 6, 2005; author's e-mail: [email protected])