Energy Finance

The surprisingly large storage build of 104 billion cubic feet reported for the week ending July 11 suggests that electric utility gas consumption is lagging due to the economic slowdown, more normal weather patterns, and the impact of rising natural gas prices, says Michael Lewis, head of DB Global Markets Research, Bloomberg.  

But with Nymex gas futures prices now well under $12 per million Btu across the entire upcoming winter, some of that demand may be won back, says Jeb Armstrong, analyst for Calyon (USA) Securities. Yesterday’s triple-digit storage injection spooked the E&P sector, causing gas to sell off 8%.

“The worry is that the injection may mark a fundamental shift in the supply and demand of natural gas in the US. Fear has greatly compressed valuations as the market expects a larger and longer correction than we anticipate,” says Armstrong.

So, where is the floor? The front month gas contract has fallen over 20% since peaking on July 3. Yesterday alone the contract fell 8% after the EIA announced storage numbers.

Gas finally found support at the $10.50 million Btu level, but the worry is not the decline itself. The consensus has been an expectation that prices would head lower and there have been larger corrections, on a percentage basis, in the past few years, says Armstrong. The concern is about the rapidity with which it has occurred and the absence of any apparent support level.

That it was a triple-digit inventory build was by itself not unprecedented. There was a build of 105 billion cubic feet as recently as late May. Typically, such large injections occur during the shoulder months when demand is weakest.

What spooked the market was a much larger-than-expected build thrown on top of already bearish sentiment. Consensus called for an 88 billion cubic feet build with estimates ranging from 70 to 97 billion cubic feet. Clearly, something was missed. The EIA stated that there was nothing unusual at its end.

There are a number of possible explanations, says Armstrong. Consumption may have been dampened by the combination of relatively benign temperatures and less demand over the July 4th weekend. Also, extra supply may have been added to the market due to the timing of LNG shipments and the price difference between the spot and front month gas contract, which may have encouraged storage operators to buy gas on the spot market and then sell forward. This is possible since the volume of gas in pipelines is not counted as storage and can fluctuate.

Next week’s inventory report will be critical in determining whether this week’s build was an anomaly or an emphatic stamp on the end of this year’s bull run in energy. Calyon expects stocks to show some life in the near term due to short covering and a heat wave rolling through the midwest and northeast. However, stocks will need to see gas prices stabilize for an extended period before undertaking a more fundamental rally.

You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.