Friday, October 10, 2008

Natural Gas Floor Set at $6.50/mmBtu

Oct. 9 (Bloomberg) -- Natural gas in New York gained after prices slid to the lowest in a year, prompting buying before the start of the heating season when demand for the fuel peaks.

Natural gas has tumbled 50 percent since closing at a 30- month high of $13.577 per million Btu on July 3. Utilities and industrial consumers can buy the fuel now to guard against higher prices that may come as demand rises and outstrips production.

``Gas is going to hold around $6.50 because if you go much lower, a lot of supply will come off the market,'' said Tom Orr, research director at Weeden & Co. in Greenwich, Connecticut. ``With cold weather arriving, prices may be more like $7.50 to $8.''

Natural gas for November delivery rose 8.3 cents, or 1.2 percent, to settle at $6.825 per million British thermal units on the New York Mercantile Exchange. Gas fell as low as $6.51 yesterday, the cheapest it has been since September 2007.

Natural gas for delivery in February 2009 is trading at a premium of about 66 cents to November product. When gas for future delivery costs more than near-month contracts, it's a situation technically known as contango, which encourages companies to boost stockpiles now for use later.

``Gas is a screaming buy right now, especially if we get above-normal heating demand this winter,'' said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. ``You could have a big withdrawal season, perhaps as much as 2.5 trillion cubic feet.''

Stockpiles started the previous U.S. winter at a record 3.545 trillion cubic feet in November 2007 and declined by 2.31 trillion by the end of March in a normal winter, Jarvis said.

Cold Winter Forecast

The approaching U.S. winter may be the coldest in five years, especially in the eastern part of the country, Joe Bastardi, a forecaster for, said yesterday.

A lot of production may be taken off line as prices languish at a time when demand increases because of lower temperatures, said Jarvis.

Chesapeake Energy Corp., the second-biggest U.S. independent natural-gas producer, cut its output growth forecasts on Sept. 22 and lowered its capital expenditure budget by $3 billion through 2010 because of slumping energy prices.

A government report today showed that U.S. supplies advanced in line with analysts' expectations, keeping inventories in a small surplus to the five-year average.

Inventories gained 88 billion cubic feet in the week ended Oct. 3 to 3.198 trillion cubic feet, the U.S. Energy Department said today. Analysts forecast an 87 billion-cubic-foot advance. The average increase this time of year is 69 billion.

Five-Year Average

The increase kept supplies on a pace to be above the five- year average of 3.327 trillion cubic feet at next month's start of the peak-demand heating season. The surplus to the average widened to 69 billion, or 2.2 percent, from 50 billion, or 1.6 percent a week earlier.

Oil and gas companies had yet to restore 39 percent of the Gulf of Mexico's daily output of 7.4 billion cubic feet as of yesterday, following last month's hurricanes, according to the U.S. Minerals Management Service.

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