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Storage, Production Woes Give Bulls Another Reason

Storage, Production Woes Give Bulls Another Reason

Sweltering heat and higher cash prices tipped the scales in bulls' favor again yesterday at the New York Mercantile Exchange as prices snapped back with a one-two combo to easily recoup the almost nickel decline posted during Tuesday's Access trading. The first spike occurred at the open as speculators were seen loading up their long positions for the second morning in a row. After that initial surge the market moved mostly sideways until right before the close, when a round of market on close (MOC) buy orders lifted the August contract 2.7 cents to its $2.601 final resting place. For the fifth day in a row, estimated volume topped the 100,000 mark at 139,502 contracts.

Although the August contract was able to bubble higher late in the session, the rest of the months were held relatively in check during the regular open-outcry session yesterday. But their time would come and if the two earlier spikes were jabs, this one was a roundhouse. The American Gas Association (AGA) reported a startlingly low storage injection of 41 Bcf yesterday for the week ending July 23, and Nymex Access trading reacted with an immediate 10-cent jump past $2.70 in September futures. Currently working gas in underground storage stands at 2,280 Bcf, 43 Bcf less a year ago, but 205 Bcf more than the five-year average, according to AGA data.

Hot weather and strong demand for gas to fuel peaking power generation certainly played a roll in slowing the pace of injections, but declining production also should take some of the blame. According to second quarter data released by 11 large U.S. gas producers, representing a little more than 22% of total U.S. production, gas production was down 5%. Exxon, Chevron, Texaco, Mobil, Arco (including Vastar), Unocal, Occidental, Union Pacific, Conoco, Marathon and Enron Oil & Gas reported producing a combined 12,123 MMcf/d of gas in 2Q99, compared with 12,728 MMcf/d in 2Q98 (See Table).

Armed with declining production and reserves, bulls are having it their way, a Midcontinent marketer said. "Right now there is a discussion among my co-workers as to whether we should sell all of our August supply baseload or save some for the swing market. By taking gas into the swing market you have an obvious downside risk, but you stand to capture a rally or two if a hurricane develops. In fact, with the tension in this market right now all it needs is for the little gray-haired man (Weather Channel's esteemed tropical forecaster John Hope) to show his face on the TV and this market will jump another 15 cents."

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