Large US natural gas draw fails to lift prices above $5/MMBtu

25 February 2010 22:32  [Source: ICIS news]

HOUSTON (ICIS news)--A large pull from US natural gas storage last week could not send futures prices above $5/MMBtu on Thursday in what sources said could be a prolonged stretch of suppressed prices.

The US Energy Information Administration (EIA) reported a 172bn cubic feet (bcf) drawdown out of underground inventories in the week ended 19 February, bringing the US total to 1,853 bcf.

That level is 2.9% below last year's stockpiles at the same time, with the multiple bursts of cold weather over the past month shaving off large amounts of the heaping overhang that put prices below $3/MMBtu leading into the US autumn injection season.

The typical delivery during the third week of February is around 100 bcf, according to energy analyst Stephen Schork of The Schork Report.

Now, as the US economy shows signs of recovery and has sent crude oil and equities soaring, the ceiling on natural gas has been cut short.

"Everything has at least participated in a bit of an economic turnaround except for gas, which inexplicably collapsed last week as everything went up," said Tom Orr, managing director of research at brokerage firm Weeden and Company in Greenwich, Connecticut.

Thursday's government report showed a delivery number in the upper range of analysts' estimates of a 165-175 bcf draw.

However, the front-month April NYMEX futures contract lost 9.2 cents and finished trading at $4.767/MMBtu, the fourth straight session below $5/MMBtu.

Prior to Monday, front-month futures had been above $5 for nearly 12 weeks.

But as natural gas storage levels dwindled in January, so did drilling activity.

"For every step forward the market potentially takes, it is offset by the additional supply coming into the market," said Jen Snyder, a natural gas analyst at energy consulting firm Wood Mackenzie in Boston.

North American gas rigs rose in the week ended 19 February to 893 units, compared with 781 rigs in operation during the first week of January, according to data from oil and gas services firm Baker Hughes.

The thinking is that shale play producers have to run rigs to justify massive capital investment, painting a psychologically bearish supply picture for investors, Orr explained.

"Gas is a funny animal and gets in this space every now and then, and it seems the thinking is singularly negative," Orr said.

Snyder agreed, and said that robust production levels now will not show in the market for another three to six months.

Add in natural gas' uncompetitive pricing in the industrial sector compared with coal this summer, as well as an increase in liquified natural gas (LNG) imports to the US, and futures prices will have trouble sustaining themselves above $5/MMBtu, they said.

"In general, our feeling is that we'll be pricing in the upper $4s and low $5s and into 2011," Snyder said.

Orr predicts an average futures price at $5.05/MMBtu for the year as values stay in the mid-$4.00s/MMBtu through the second quarter.

Natural gas prices are an important barometer for chemical commodities that rely on natural gas as a production feedstock and power fuel.

Deep draws in US and Europe's once-huge inventories after high heating demand winters could signal a bump in pricing, as stockpiles lower in the summer and US production pulls back.

"You really could find a bit more support for the market in the next couple of months," Snyder said. "But I don't expect it to last."

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By: Ryan Hickman
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