Natural Gas

Overview:

Prices headed up the middle of last week despite seasonal or cooler temperatures everywhere but California (See Temperature Map) (See Deviation from Normal Temperatures Map) and the July 4th holiday, regarded as one of the lowest natural gas consumption days.As expected, the resulting 10-cent-per-MMBtu gain at the Henry Hub on Thursday compared with the previous Friday was undone the following day. The futures price for August delivery was able to stay ahead of the previous week by 12.2 cents to settle at $3.218 on Friday. Spot natural gas prices for large packages in southern California increased as much as $2.71 per MMBtu as temperatures soared and gas-fired power plants endeavored to meet air conditioning demand. Prices started to recede as temperatures abated by the end of the week.Strong gas supplies across the country supported another hefty net addition to storage of 105 Bcf.

Prices:

The spot price at the major eastern supply points gained as much as 20 cents by mid-week then lost 11 to 22 cents on Friday.At Waha, Texas, the price reached $3.13 per MMBtu before drifting to $2.91 on the last day of the week; at Katy, Texas, comparable figures were $3.19 and $3.02, and at Midcon, Oklahoma, $3.02 and $2.83. Citygate prices were $3.26 and $2.94 per MMBtu in New York and Chicago after rising to as much as $3.41 and $3.09, respectively, during the week. The heat wave in California caused spot prices at Malin to increase by $1.16 while other supply sources held fairly stable. Not even a compressor station outage on the Northwest Pipeline at Stanfield had an implication for prices in northern California. The price for large package sales on the SoCal system, though, was up $1.98 at the end of the week compared to the previous week—to $5.81 per MMBtu.

The NYMEX contract for August delivery paralleled the movement in the cash market with a weak opening, then a build-up in the middle of the week to as much as $3.290 per MMBtu during Thursday only to be partially undone on Friday. At the end of the week, the near-month contract settled at $3.218 per MMBtu, up from the previous Friday's settlement of $3.096. The September contract settled at $3.292. October, the last month of the refill season, closed at $3.382. Through the upcoming heating season, the highest settlement price on Friday was for the January contract at $4.122.

Storage:

Net injections to storage during the first 3 months of the refill season were the highest ever at 1,187 Bcf, more than double last year's fill by this point and over 60 percent higher than the 6-year (1995 to 2000) average. For the tenth consecutive week, the American Gas Association (AGA) estimated that net injections neared or topped 100 Bcf, with 105 Bcf added during the week ending June 29 (See Storage Figure). This is 26 Bcf greater than the average for the week.Net injections of 32 Bcf in the Producing Region were more than double the previous record of 15 Bcf established during the same week in 1994. With the latest addition, stocks in the Producing region are 10.4 percent above average.Stocks in the East have edged ahead of average for this time of year, while the gap in the West has narrowed from almost 50 percent below average at the close of the heating season to just 3.9 percent below on June 29.

Other Market Trends:

With the steady decline in natural gas prices started at the end of the last heating season, the city gate price of natural gas in the New York City area drifted below the spot price for No. 2 distillate fuel oil in mid-April. It now is approaching the price of the typically less expensive high sulfur residual fuel oil (See Fuel Prices in the New York City Area).The commitment to the $26 to $28 per barrel range for the OPEC basket of crudes will probably keep a floor on oil prices, with significant implications for natural gas markets.The growing price competitiveness for natural gas could persist in the foreseeable future, thereby attracting some consumers that switched fuels or curtailed operations back to natural gas as their fuel of choice. In light of the recent price declines and record-setting stock builds, natural gas prices may resist increases as these customers reenter gas markets.

Summary:

Reduced demand due to the mid-week holiday along with the continued lack of significant summer heat and another report of record high injections eventually put downward pressure on natural gas prices.Natural gas prices are now comparable with even high-sulfur residual fuel oil and it appears that only a protracted surge in cooling demand could reverse this trend.