Natural Gas Falls Below $3, 1st Time Since 2002, on Supply Glut
bloomberg.com
By Reg Curren
Aug. 20 (Bloomberg) -- Natural gas futures fell below $3 per million British thermal units for the first time in more than seven years after a government report showed rising supplies of the industrial and power-plant fuel.
U.S. gas inventories rose 52 billion cubic feet to 3.204 trillion in the week ended Aug. 14, the Energy Department said today in a weekly report. Supplies were 19 percent higher than the five-year average.
“We have such a storage overhang staring you in the face,” said Cameron Horwitz, an analyst at SunTrust Robinson Humphrey Inc. in Houston. “There won’t be any sustainable upward momentum until you work through this storage problem.”
The September gas contract fell 17.4 cents, or 5.6 percent, to settle at $2.945 per million Btu at 2:57 p.m. on the New York Mercantile Exchange, the lowest close since Aug. 14, 2002. Futures, based on the contract closest to expiration, last traded below $3 on Aug. 15, 2002, according to data compiled by Bloomberg. Prices have dropped 48 percent this year.
“If you think storage is going to bump up against physical limitations, then there’s really no place for the price to go but downward,” Horwitz said.
Demand from factories, steel mills and chemical plants tumbled 13 percent in the first five months of 2009 because of the recession, department figures show. Industrial users account for about 29 percent of gas demand.
Storage Capacity
“This is the precursor to a bit more of a pullback down into the $2.25 to $2.50 range,” said Martin King, an analyst at FirstEnergy Capital Corp. in Calgary. “Producers have to carve back supply, otherwise it’s going to run into a big wall come late September.” U.S. storage capacity is about 3.95 trillion cubic feet, King said.
Should weekly storage increases match the five-year average between now and the end of October, inventories would reach about 3.88 trillion cubic feet, according to Energy Department data.
“There’s a lot of gas in the ground and we’ll probably end the injection season with 3.8 trillion,” said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. “It’s definitely going to be a record.”
The lack of storm threats to the Gulf of Mexico and the passing of the peak for cooling needs, coupled with the storage glut, have pressured prices, he said.
“There’s really no catalyst or conviction to get long,” or buy natural gas, Jarvis said.
Earlier this month, XTO Energy Inc. and Devon Energy Corp., two of the five largest producers of U.S. gas, reported record output and smaller declines in earnings than analysts estimated. Anadarko Petroleum Corp., London-based BP Plc and Chesapeake Energy Corp. also reported second-quarter output gains that helped them beat estimates.
Rising Gas Production
The U.S. this month raised its forecast for natural gas output in 2009 to an average 58.65 billion cubic feet a day, up 0.7 percent from 58.23 billion predicted in July.
The production estimate compares with 58.59 billion produced in 2008, the Energy Department’s Energy Information Administration said in its monthly Short-Term Energy Outlook, released Aug. 11 in Washington.
Today’s trading “is the beginning of the price signal needed to bring about large-scale shut-ins in the U.S. and Canada,” King said.
Gas Demand
U.S. gas consumption will average 61.76 billion cubic feet a day this year, the department said in the outlook. The total is down from 63.41 billion last year.
Prices may rebound later this year and into 2010 once cuts to production and exploration begin to reduce supplies, demand picks up as the economy recovers and winter heating needs rise, Jarvis said.
“We’re at levels companies pretty much are forced to shut in,” he said.
Natural gas rigs working in the U.S. last week rose by seven, or 1 percent, to 688, Baker Hughes Inc. said on Aug 14. It was the fourth week in a row that gas rigs gained. Oil rigs declined by five, or 1.8 percent, to 272.
Gas demand may recover as the U.S. economy emerges from the worst recession since the Great Depression of the 1930s.
Manufacturing in the Philadelphia area unexpectedly expanded in August for the first time in almost a year. The Federal Reserve Bank of Philadelphia’s general economic index climbed to 4.2 from minus 7.5 in July, the bank said today. Positive readings signal an expansion.
Manufacturing in the New York region grew in August for the first time in more than a year, the New York Fed said in a report on Aug. 17.
To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.
Last Updated: August 20, 2009 16:18 EDT |
