With preliminary oil and natural gas infrastructure damage reports from Hurricane Rita looking more positive than expected, natural gas futures traders in the extended Sunday Access trade session moved October futures down to $11.78, over 54 cents lower than Friday’s weak close, which itself was 46.6 cents down from Thursday. However, futures showed a burst of strength in trading on Monday afternoon, bringing the prompt month higher to settle at $12.44, up 11.6 cents from Friday.
Continuing its weakness from the Access session Sunday, which was expanded by Nymex to help its members manage risk following Rita, October natural gas futures on Monday morning continued lower, bottoming out at $11.68 as of 10:22 a.m. EDT. The prompt month slowly climbed from there until 1 p.m., when it began its rebound in earnest.
“Traders may have overdone it in Access trading because everyone was expecting a Category Four or Five hurricane at the end of business Friday, but it ended up being a Category Three Hurricane that missed Houston,” said Tom Saal of Commercial Brokerage Corp. in Miami. “However, Rita still hit the refineries and the rigs, so I think the push lower was a little overdone.”
Exxon Mobil CEO Lee Raymond was one of those watching the offshore Monday. Raymond, in a broadcast CNBC interview aired after the market closed, said he was concerned “offshore production from Katrina is still curtailed, largely because some of the big installations in the deep water of the Gulf still are not on, and we’re still having a lot of difficulty restoring gas processing and pipelines onshore, which were damaged very severely by the high water. In many respects the story of Katrina that’s most relevant is the offshore, and not even so much crude oil, but ultimately natural gas supply which will become an issue, I think, later this winter.”
In the trading arena, Saal said there should almost be an asterisk on the prices set during Access trading because that session sometimes is a little illiquid. “That has been one of the complaints on the afterhours session, because you can move it around on small volume,” he said. “Markets do have a tendency of correcting themselves though, and I think that is what happened here. Cash prices remain pretty stout.”
With October’s expiration on Wednesday, Saal said the futures market also saw rollovers on Monday. “It looked like some of the length was rolled out of the October contract and into the winter months, because the winter months were up pretty significantly.
During Monday’s session, December natural gas increased 47 cents to close at $13.637, while January 2006 and February 2006 increased by 46 cents and 43.7 cents, respectively, to close at $13.932 and $13.789.
“With Katrina, the futures market overreacted dramatically and then found out that the damage to the oil and gas infrastructure wasn’t quite as bad as first thought,” Saal said. “They didn’t want to repeat that this time, so they did it the other way. They thought the damage wasn’t as bad as was expected, that’s why it sold off on Access. However, we came in this morning and the cash market was off the Richter scale, so there is obviously still some strength out there. I don’t think we will know how much strength there is until the dust settles and damage reports are figured out.”
The key question facing the natural gas industry will be the condition of platforms and pipelines that bring both oil and gas from underground reservoirs to shore as well as gas processing plants and pipelines. The energy industry is only beginning to assess the damage to that infrastructure from Rita. But the experience of Katrina isn’t encouraging.
Katrina slashed through the eastern third of the developed portion of the Gulf of Mexico. While production in the central and western Gulf was quickly restored after the storm passed, the eastern section, where Katrina’s eye passed through, is still largely out of service. The amount of production still off-line from Hurricane Katrina was reduced to as little as 3.37 Bcf/d as of Sept. 19, according to Minerals Management Service (MMS) figures.
As of Monday Sept. 26, total shut-in production stood at 7.8 Bcf/d, which is equivalent to 78.43% of the daily gas production in the Gulf, which is currently approximately 10 Bcf/d. Cumulative lost production from Katrina and Rita combined now stands at 163.869 Bcf, which is equivalent to 4.49% of the yearly production of gas in the Gulf, which is pegged at approximately 3.65 Tcf.
Commercial Brokerage’s Ed Kennedy warned people Monday morning that caution may be the operative word for traders. “It’s going to take a few days (to assess the damage) because of all the natural gas facilities that were out there,” he said.
The Commodity Futures Trading Commission in its weekly Commitments of Traders Report last Friday said noncommercials held a net short position of 7281 (futures only) contracts as of Sept. 20. This is a reduction of 3,500 contracts from the 10,781 net short contracts held a week earlier.
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