US Staring Into Abyss Of Sub-$3 Gas
(Copyright © 2009 Energy Intelligence Group, Inc.)
World Gas Intelligence Wednesday, August 19, 2009
Front-month US gas prices at Henry Hub are testing the $3 per million Btu mark this week, closing at a seven-year low of $3.096 Tuesday following nine straight days of losses. Swelling gas storage is the key driver of bearish sentiment, as traders wake up to the fact that a theoretical overflow of supply may well become a reality within weeks as the country's mammoth storage caverns fill up (WGI Aug.5,p6).
If so, US producers will have to shut in wells to restore balance. LNG producers thousands of miles away may also be forced to resort to even more "maintenance" at old trains and "delays" in starting up new ones if the long-held assumption that the US can always be viewed as an LNG market of last resort proves to be flawed (WGI Jul.29,p1).
“The fact that there was 3.1 trillion cubic feet in storage during the first week of August with 12 reporting weeks left to go has had a big psychological impact on the market,” says a gas futures trader in Florida. “In order to avert an all-out train wreck to the down side, we need to see more production decline and demand improvement. We're not seeing either."
“We’ve been in a $3.50 to $4.25/MMBtu range over the last few weeks, but now the writing is on the wall for a potential overflow of gas storage to happen in the next few weeks,” said a gas futures trader in New York. “Now the new range is probably going to be $2.75 to $3.50, happening within a matter of days -- not weeks.”
Of particular concern is the level of stocks in the main US gas producing region along the US Gulf Coast, home to the Henry Hub and many of the country's largest new LNG import facilities. With no sign as yet of the hurricanes that often disrupt production at this time of year, regional gas storage facilities are already over 90% full. They contained 1.073 trillion cubic feet of gas as of Aug. 7, against estimated capacity of 1.1 Tcf. Last year and on average for the previous five years, producing region storage stood at around 800 billion cubic feet at this point.
“Once we start to approach capacity levels in the [producing] region, it’s very likely to inflict some major downside pressure on the gas market -- not just on cash prices, but on futures, too," says a physical gas trader in Texas -- spreading the weakness into the winter months in which many LNG merchants are hoping to sell cargoes or regasified LNG at prices much above current levels (WGI Aug.5,p1).
Multiplying pricing worries are forecasts for an unusually low number of hurricanes this year. The most recent year in which no hurricane activity was experienced in the Gulf was 2006, providing a model of how Gulf storage could fare in the absence of storm-related shut-ins: Producing region storage ended July 2006 at 847 Bcf and ended the injection season at 1.015 Tcf, a 167 Bcf late season refill that would surely cause gas storage to overflow this year if duplicated.
“It is possible to have Henry Hub crater on prompt month to unbelievably low levels, particularly if pipes begin calling high-inventory OFOs [operational flow orders] and charging $25/MMBtu penalties if you are long,” one Florida-based trader notes. An operational flow order requires gas shippers to balance their injections with customer withdrawals on a daily basis.
An economic rebound could solve the problem, since along with last year's surge in shale gas production, a 30% drop this year in industrial demand is a leading cause of the current oversupply. Industrial users account for nearly 30% of US consumption overall. But whether this will come quickly enough to save gas prices is highly uncertain, even with some bounce expected from the government's Cash for Clunkers program of fuel inefficient car purchases (WGI Aug.12,p8).
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I still think we're gonna see a bounce in natty prices from tomorrow's report (assuming no big surprises in the number), because the report for the next week after that is looking to be somewhat bullish because of hotter than normal weather. Let's see what happens here -- I'm standing ready to add to my bearish natty bets if we do get a bounce. |
