March natural gas futures retreated in lackluster trading Friday on the New York Mercantile Exchange. Prior to the open of floor trading the March contract did breach the $4.00 level, trading as low as $3.921 in early Globex trading. Traders cited continued worries of a pervasive supply overhang, although others see factors in play working to contract the surplus. At the close March futures had fallen 7.2 cents to $4.006 and the April contract was down 7.5 cents to $4.036. March crude oil dropped 54 cents to $38.94/bbl.

Conventional wisdom has it that burdensome natural gas supplies and a lack of industrial demand are likely to keep gas prices subdued for a number of months, if not the balance of the year. But a Connecticut-based analyst sees forces in play that are likely to result in less of a supply overhang in the coming months.

According to his calculations, prices make it attractive to burn gas at the expense of coal. “We are already through the 12 [MMBtu/MWh] heat-rate coal plants by a significant margin,” said Tom Doremus, principal with Crossbow Energy Advisors, an energy consulting firm. He said that had resulted in a 1 Bcf/d increase in demand, and “there is a lot of baseload power derived from coal, but if only 10% of coal-fired generation switches to natural gas, that would be an extra 7 Bcf/d demand.”

In addition, Doremus suggests that a heavy nuclear maintenance season this spring is likely to spur unanticipated demand for gas. “Last fall we saw a very shallow nuclear maintenance season, so now we are looking at a very deep spring maintenance season. We are at the point where they will start taking nukes off-line now. Switching to natural gas has occurred on the less efficient coal plants, and rig counts now stand at 374 fewer than a year ago. The [supply] pendulum has swung so far to the bearish side that you can’t see the forest for the trees. I am going the other way [away from supply surplus] now,” he said.

Others believe that the surplus is likely to grow. They cite the lower-than-anticipated 24 Bcf storage draw reported Thursday by the Energy Information Administration as a sign that burdensome inventories may persist. “While we feel that this figure was fully discounted in yesterday’s trade, we are also of the opinion that further expansion in the supply surplus may not be adequately digested into the futures market,” said Jim Ritterbusch of Ritterbusch and Associates.

Economy watchers noted that the 8:30 a.m. EST Friday release of inflation figures by the Labor Department were right in line with expectations. The January Consumer Price Index (CPI) was 0.3%, equal to the 0.3% the market was expecting but higher than the minus 0.8% of December. Overall inflation figures can be quite volatile from one month to the next, and economists will often focus on core inflation, excluding food and energy prices. Core CPI was 0.2%, just above the 0.1% expected and above December’s 0.0% reading.

For the moment there is little concern that the recently signed $787 billion government stimulus package is likely to ignite inflation. In a Feb.18 speech Federal Reserve Chairman Ben Bernanke said it should “help to better stabilize the public’s inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low. We expect inflation to be quite low for some time.”

©Copyright 2009Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.