Falling

Buoyed by crude oil and by falling mercury readings in the Northeast, natural gas futures rebounded sharply Tuesday morning as fund traders added to their long positions. However, the day’s advance was tempered slightly when afternoon as light selling entered the fray and deposited the prompt contract back below the psychologically important $6.00 mark. By virtue of its 12.5-cent advance and $5.977 close, the March contract remains in bulls hands. At 99,244 estimated volume was heavy and served to punctuate the price advance.

The Rockies remained the last bastion of rising prices Thursday with gains on either side of 30 cents for CIG and Questar and about a quarter for Kern River and Northwest. Otherwise the cash market found it had already milked the last drop of price strength from a return of cold weather in the East. Even the Southwest basins, California and intra-Alberta joined eastern points in price movement that ranged from flat to down about a quarter in most cases. The Northeast again led the way downward with even bigger losses that ran as high as about 70 cents at the Algonquin citygate.

The last seven days are going into the record books, according to reports now coming in from northeastern natural gas and power utilities. Old Man Winter 2003 hit the region with a vengeance, breaking previous years’ winter records for power send-outs in four of the last seven days. Three Mid-Atlantic gas distributors also reported record deliveries on Jan. 23.

After falling during the regular session Wednesday, natural gas futures rebounded to erase that loss in the late afternoon as traders reacted to the news of a larger-than-expected 49 Bcf storage withdrawal.

Despite high storage levels and falling gas futures prices, consultants at Energy and Environmental Analysis Inc. (EEA) are convinced that low gas production and inadequate drilling will pressure Henry Hub prices up to $5.35/MMBtu on average next year and in 2004, given normal weather. The 12-month strip of futures prices currently is about $1.50 less than that.

With tropical storm threats fading rapidly and demand fundamentals staying on the weak side, cash prices ignored a major expiration-day rebound by October futures and continued to fall everywhere except in the Rockies Thursday. The Rockies gains were small at a dime or less, while losses elsewhere tended to range from about 2 cents in Northern California to nearly half a dollar at some Northeast citygates.

Capping a tumultuous tenure as prompt month, the October contract went out with bang Thursday as two distinct waves of buying were more than sellers could handle. After ratcheting higher throughout the late morning following the news that 67 Bcf worth of gas was injected into storage last week, the prompt month dove lower in the afternoon. But just when it looked as if October would drop below the critical $3.50 mark, market-on-close buyers stepped in. That support, combined with an absence of willing sellers, sent prices through the roof in the last 30 minutes of trading. October settled at $3.686, up 19.2 cents for the session and 26.6 cents above where it was when it took over as prompt contract at Nymex a month ago.

An official with North America’s largest independent gas production company, EnCana Corp., predicted last week that the current gas storage surplus would be depleted before the end of the winter and that gas prices would rise above $4/MMBtu from $3.25 currently (Henry Hub cash) but would not soar to the levels seen two winters ago.

As long as high natural gas storage levels persist — now about 18% above the five year average — prices could drop to as low as $2.00-$2.25/MMBtu in the next few months, and as prices trend downward, weakness in the share prices of U.S. exploration and production (E&P) companies will persist, according to the latest oil and gas production research by Lehman Brothers analysts.