Volatility Drives Natural Gas Market, but Bears Gain Ground
(Copyright © 2005 Energy Intelligence Group, Inc.)
Monday, October 31, 2005
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If there were one common theme for last week's natural gas market, it would most likely be wrapped up in one word -- volatile. Oscillating technical indicators, increased cold weather demand and hurricane-related loss of demand created huge price movements. Factor in bullish market hype from one of the largest players in the industry versus yet another larger-than-expected storage data report, and you had all the makings for a wildly churning market.
No doubt much of that volatility can be attributed to cash market bullishness stemming from the Nor'easter that blanketed areas along the Eastern Seaboard. But what many didn't take into consideration was the mitigating loss of gas demand in Florida due to Hurricane Wilma.
As Wilma came ashore as a Category 3 hurricane to the southern end of the Sunshine State, up to 6 million residential and business electricity consumers lost power, and some areas may be without power for up to three weeks. Since a large percentage of that power is gas-fired, the loss in demand partly counterbalanced the increase in demand in areas of the Northeast.
An analysis of pipeline demand using Gas Metrics data showed that while areas along the Northeast peaked at about an additional 1.5 Bcf/day of gas last week due to the drop in temperatures, Florida lost about 500 MMcf/d of demand due to the hurricane. But while the cold-weather demand dissipated going into last weekend, demand loss in Florida will continue to pile up until power is fully restored.
As for Gulf of Mexico production, the daily Minerals Management Service report turned the corner and started to show gains again last week, moving the market in the right direction after several days of losses from Hurricane Wilma shut-ins. As of Friday, the MMS reported that 67.8% of oil and 55% of natural gas production still remained off line in the Gulf. However, Gulf Coast production appears to be coming back at a steady pace as Enterprise Products Partners said last week that Toca was up to 280 MMcf/d and continuing to ramp up daily. They also noted good recovery in some other Louisiana facilities.
Other market movers for the week surrounded the release of the Energy Information Administration gas storage data report that was higher than anticipated. The EIA reported injections of 77 Bcf or 11.0 Bcf/d for the week ended Oct 21, raising gas in storage to 3,139 Bcf. The report was notably higher than the Nymex ICAP auction, which implied a storage build of 67.1 Bcf, or 9.5 Bcf/d, which was also within expectations of most industry analysts. However, earlier in the week Gas Metrics pipeline data suggested a storage injection in line with the prior week's 75 Bcf (see p16). If it were not for the loss of 37.9 Bcf for the same period due to shut-ins in the Gulf of Mexico, the storage injection for last week could have been as high as 115 Bcf.
"We now have solid irrefutable evidence of price-induced demand destruction, as we are seeing is a clear trend of higher than expected storage builds -- even with a large portion of Gulf production still shut in," one gas trader said. For this week, early Gas Metrics data shows the possibility of around a 50 Bcf build in gas inventories, while other industry estimates are in the 25 to 35 Bcf range.
The Nymex December gas futures contract tumbled lower last week as storage inventories swelled. At the end of trading on Friday, the December gas contract closed at $13.055/MMBtu, down 62.9¢ on the day, but up 18.3¢ for the week. Earlier in the week, the November gas futures contract rolled off the board at $13.832/MMBtu, down 20.8¢, while the Nymex 3-day settlement average is $14.070/MMBtu. The settlement was 7.5¢ lower than last month and $6.206 higher than the November 2004 contract settlement.
Despite a bullish conference call by Goldman Sachs to the industry last week calling for the possibility of $20 gas futures this winter, indicators suggest that prices are likely to grind lower this week. Due to a warming trend across much of the country expected for the next two weeks, both crude oil and natural gas futures are likely to drift lower. However traders still need be cautious for the usual dose of bullishness that can emerge at moment's notice and inject a high degree of volatility into gas prices.
Even though the December crude oil market has been meandering around $59 to $61 a barrel for the past couple of weeks, current technical indicators point to an erosion down to the $58 to $59 level this week, while December natural gas futures could very well grind down to the $12.25 area before buyers come back into the market to take prices up again.
-- Alan Lammey
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