Rig Count Up and Price is Down

By Asjylyn Loder

March 26 (Bloomberg) -- Natural gas fell to a six-month low in New York on surplus fuel inventories, a rising rig count and mild weather that is expected to cut demand.
The U.S. added two natural gas rigs, bringing the count to 941, up 16 percent from a year earlier, Baker Hughes Inc. said today on its Web site. The increase in gas rigs was the 13th in a row. During that time, 190 rigs have been added.
“We’ve had all these stops and starts, with good news, bad news, good news, bad news,” said Michael Rose, director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida. “That’s not enough to get natural gas out of the trend that it’s in.”
Natural gas for April delivery fell 10.9 cents, or 2.7 percent, to settle at $3.872 per million British thermal units on the New York Mercantile Exchange, the lowest closing price since Sept. 28. Natural gas has dropped 31 percent this year.
The market is now in a “holding pattern” around $4 as traders wait for any economic news that will support a move in the fuel, Rose said. “I’m a reluctant buyer at $4.”
The heating and power-plant fuel dropped below $4 yesterday for the first time in six months after a report from the Energy Department that inventories gained 11 billion cubic feet in the week ended March 19 to 1.626 trillion.
“We’ve broken below a significant level at $4,” said Teri Viswanath, director of commodities research with Credit Suisse Securities USA in Houston. “Now that we’re below $4, you’re seeing structural changes. Coal generators at $4 gas will not recapture market share, and sub-$4 pricing is not a siren call for LNG cargoes to head this way.”
Imports May Rise
U.S. imports of liquefied natural gas may rise 45 percent in 2010 to approximately 1.8 billion cubic feet per day, the Energy Department forecast March 9 in its monthly Short-Term Energy Outlook. The estimate for 2010 imports was 1.6 percent lower than the February forecast.
Traders are not yet convinced that the structural changes have wiped out weakness in price and may wait for prices to fall further before buying, Viswanath said. At a seminar with investors this week, about 60 percent thought prices still had further to fall.
“There’s a saying, ‘Don’t catch a falling knife,’” she said. “That’s what’s happening here.”
Surplus Grows
The storage surplus compared with the five-year average widened to 8 percent from 4.7 percent in the previous report, according to department data.
Deliveries of gas to industrial consumers fell 512 billion cubic feet, or 7.7 percent, in 2009 from the previous year, according to the Energy Department.
“You’ve got crummy weather, a crummy economy, a growing source of supply and an economy that is constricting demand,” said Mike Fitzpatrick, vice president of energy at MF Global in New York.
U.S. production reached an all-time high of 26.3 trillion cubic feet in 2009, up 2.2 percent from the previous year, Energy Department data show.
“Now that you’re below $4, that’s well below the break- even point for bringing new facilities online, so that’s going to eat into supply,” Fitzpatrick said. “Not today or tomorrow but over time.”
Heating use will be below normal in most of the U.S. through April 2, said David Salmon, a meteorologist with Weather Derivatives of Belton, Missouri, in his daily report.
“Some early spring chills hang over the eastern U.S. for a time next week, but eventually a big warmup in the middle of the country spills eastward to gobble up all the big cities, driving the population weighted heating demand to well below normal,” Salmon said in his report.
ETF Slips
Falling natural gas prices have driven the $2.9 billion U.S. Natural Gas Fund to new lows. The exchange-traded fund fell 16 cents, or 2.2 percent, to settle at $7 on the New York Stock Exchange. The fund is down 31 percent this year and 86 percent since it began trading in April 2007.
Wholesale natural gas at the benchmark Henry Hub in Erath, Louisiana, fell 8.82 cents, or 2.2 percent, to $3.9226 per million Btu, according to data compiled by Bloomberg.
Gas futures volume in electronic trading on the Nymex was 156,120 contracts as of 2:43 p.m., compared with a three-month daily average total of 221,000. Volume was 257,648 yesterday. Open interest was 837,152 contracts, compared with the three- month average of 791,000. The exchange has a one-business-day delay in reporting open interest and full volume data.
To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net.
Last Updated: March 26, 2010 16:21 EDT