Surplus

The healthy year-over-year natural gas storage surplus could be slimmed down rapidly this winter — putting upward pressure on natural gas prices — if the 2007 Farmers’ Almanac weather forecast holds up. “Shivery is not dead,” editor Peter Geiger said, alluding to the winter weather forecast in the latest edition of the 188-year-old publication.

Despite weaker gas prices this summer because of the gas storage surplus, Raymond James’ mid-2006 exploration and production (E&P) capital expenditure survey last week indicated North American producers’ total spending in 2006, which includes exploration and development (E&D), acquisitions and stock buybacks, will increase 10-15%.

With all eyes on the significant storage surplus, summer temperatures for the nation and the potential for hurricanes in the Atlantic, the natural gas futures market is at a crossroads, as evidenced by the prompt month’s recent directionally challenged trading pattern. After gapping lower at the open Monday, July natural gas reached both the day’s high of $6.600 and its low of $6.410 in morning trading and spent the rest of the session bouncing between the two before settling at $6.463, down 16 cents on the day.

Natural gas prices will remain depressed relative to crude oil through the summer, but as the gas storage surplus is worked off, Raymond James & Associates Inc. expects a gas price rebound to the traditional 6:1 oil-gas ratio heading into 2007.

Despite the current 53% gas storage surplus compared to the five-year average, gas storage levels could still end the injection season near a normal full level if spot gas prices decline to $5.00-5.50/MMBtu and displace coal during June and July and there is significant gas liquids stripping due to high liquids prices, according to a new analysis done by Citigroup analysts Gil Yang and Brian Chin.

Natural gas prices will remain depressed relative to crude oil through the summer, but as the gas storage surplus is worked off, Raymond James & Associates Inc. expects a gas price rebound to the traditional 6:1 oil-gas ratio heading into 2007.

Tumbling oil prices and the 60% gas storage surplus compared to the five-year average continued to pressure gas futures prices lower Monday as traders overlooked current snowy weather, below normal temperatures and forecasts of an active hurricane season.

As year-over-year weather comparisons become more favorable and surplus natural gas currently available shrinks on increased demand, the price ratio between oil and gas should “at least” approach Btu parity of 6:1 and possibly get narrower over the next six months, Raymond James analysts said in a new report. With front-end oil futures near $60/bbl, “that means the fair value for gas is about $10/Mcf, not $7.36,” which is the current price of front-month gas futures.

With the oil price squeeze, flat North American natural gas production and a strong gas storage surplus, “a trading range of $5-7/Mcf is likely to persist,” for the next year or two, said energy consultant Stephen Smith in a new report.