December 11th, 2009 by St. Clair

Yesterday we saw the first withdrawal from U.S. natural gas storage of the fall. Analysts expected a draw of 47 billion cubic feet, but the Energy Information Agency reported a much larger draw of 64 Bcf. This report reflects the impact of the first blast of wintry weather that swept through the week of December 4th. Bulls have eagerly awaited the first withdrawal which usually occurs in November.

The larger than expected draw down was enough to catapult natural gas prices 8% higher within minutes, and the gains held through the close. The market peaked at $5.347/MMBTU and closed the session at $5.298/MMBTU. This was the highest settlement seen since January.

The question now is, where do we go from here? Is this another head fake from an oversupplied natural gas market that has made several attempts at a reversal only to retreat as fast as it advanced? Or are we seeing the first move back to supply/demand equilibrium. The stout withdrawal was eagerly anticipated by all market participants, and it was just a matter of time before we had a spike to the upside. The anticipation had been building for weeks. But all of the rallies so far have faded quickly.

In my opinion the market will continue to be extremely sensitive to short-term fundamentals. Weather, storage, and production as reported week to week will cause range bound market gyrations for at least the next couple months. We have a long way to go before we will know whether we will return in 2010 to the $6-8/MMBTU market that many of the natural gas producers are predicting, or if we are looking at another year of oversupply, and low prices in the $3-5/MMBTU range.

Remember, the last production report showed a decrease in production of 1.4 Bcf per day from August to September. We would need to see a continuation of this trend in the next production report due out at the end of December to believe that we have a solid floor in natural gas prices. One scenario that could lead to a rebound in 2010 is if we see consecutive, significant drops in output due to the massive reduction in rig counts in 2009. That may signal a much lighter injection season in 2010, and a chance to work off excess inventory that has suppressed prices in 2009.

For electricity and natural gas buyers the next 8 weeks will be an important time to watch closely and plan for the next 24 – 36 months.

Natural Gas In Underground Storage Compared With 5 Year Range

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December 3rd, 2009 by St. Clair

Many industry experts had expected to see the first withdrawal of natural gas this morning. But instead of getting the 2 bcf withdrawal that was expected, the first natural gas storage report of December showed an injection of 2 bcf.

To put this in perspective, during the same week last year the Energy Information Agency reported a withdrawal of 64 bcf.  The five year average for this week has been a 43 bcf withdrawal.  Typically we start to see a draw down of supply in November.

This now leaves our natural gas supply brimming at 3,837 bcf, which is 14.5% above the five year average, and 14% above last year’s level. Of course, these numbers are a reflection of the week of Thanksgiving where we often see a slight dip in natural gas usage in the industrial sector due to the holiday.

Looking to next week it will be interesting to see if the latest blast of winter weather will finally be enough usher in the withdrawal season. My guess is that we will in fact see a modest withdrawal next week. Failure for this to materialize could signal even weaker demand than is currently assumed.

For commercial buyers of electricity and natural gas the latest report means you have another week to contemplate whether we have seen the market bottom.  One thing for sure is that every economic data point that is released in the coming weeks will be closely watched as traders, analysts, speculators and consumers try to determine where we go from here.  Prudent business electricity and natural gas users will want to be prepared to make necessary strategy adjustments based the data released in the next month.

Natural Gas Storage Report 12/03/2009

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December 1st, 2009 by St. Clair

For months analyst have been looking for the massive drop in rig counts to result in a decrease in natural gas production in the U.S. According to the Energy Information Agency’s latest production report, this has finally happened. Production in the lower 48 states fell by 1.4 billion cubic feet per day in September.

This is a bit of good news for producers who have seen the price they get for natural gas crater over the past year to a seven year low. For consumers of natural gas and electricity this may be a sign that the market is coming back in to balance, and showing support around the $5 per MMBTU mark. Many commercial and industrial users will surely take a hard look at locking in electricity contracts now that we have seen hard evidence of a supply realignment.

Yesterday we saw the official end of hurricane season that came and went without a single interruption in the Gulf of Mexico. This, along with the industrial demand destruction due to the recession, and the mild winter to date has led some to predict another year of three to five dollar gas and low electricity rates.

So what will it take for prices to rebound? First, we absolutely have to see a colder than normal winter to draw down storage which currently sits 12% above the 5 year average. Second, we need to see improvements in the economy. Finally, we need to see a continuation of the drop in natural gas production. The next natural gas production report due out December 29th will be very telling, and will set the tone for 2010.

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