UPDATE 5--U.S. natural gas falls but storage worries worsen

Thu Feb 6, 2014 5:54pm EST

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(Recasts to add detail on power conservation in CA, TX)
    By Scott DiSavino
    NEW YORK, Feb 6 (Reuters) - U.S. natural gas prices fell in
volatile trade on Thursday, after a weekly storage report showed
inventories fell by less than expected, but supply concerns
continued for a market blighted by extreme cold.
    A report from the Energy Information Administration showed
natural gas inventories fell by 262 billion cubic feet last
week, less than the 270 bcf drop forecast by a Reuters poll of
analysts, giving the market cause to sell after a strong recent
rally.
    But despite Thursday's price fall, storage levels have
dropped steeply during the coldest winter in decades, sending
ripples across the market. Pipelines are filled to capacity,
draws on stockpiles have been capped, and electricity generators
are asking customers to conserve power.
    All the while, production has fallen due to wells freezing
over, unable to produce gas.
    The California ISO, the state power grid operator, asked
customers to reduce energy use on Thursday due to a shortage of
natural gas, echoing moves by operators elsewhere. 
    The Electric Reliability Council of Texas (ERCOT), grid
operator for most of Texas, on Thursday evening asked consumers
to reduce power through noon on Friday.
    U.S. power company American Electric Power urged
customers in the Rio Grande Valley in Texas to conserve power on
Thursday because cold temperatures and high heating demand can
strain the electric system.
    Power companies have already drawn more than their
contracted gas from storage because of unremitting cold this
year, and are now being forced to buy expensive volumes on the
spot market as supplies dwindle, which has helped push prices
higher, traders and analysts said.
    "We're seeing very high prices because of freeze-offs and
storage concerns. Utilities are concerned because it's been so
cold that they are buying spot gas to make sure they have enough
in storage to get through the withdrawal season," said Aaron
Calder, a market analyst at Gelber & Associates.
    Meanwhile, storage owners are asking users to limit the
amount of gas pulled from storage caverns, as stocks become
dangerously low with nearly two months of winter left.
    Withdrawals from the Jackson Prairie gas store in Washington
State were curtailed on Thursday and will continue to be as
stockpiles deplete, according to a filing. 
    MDA Weather Services called for temperatures up to 15
degrees below normal for the center of the country for the next
five days, with milder weather seen in the 11-to-15-day outlook.
         
    Production outages due to the freezing weather also
marginally added to the tightness in the market. 
    Estimated U.S. natural gas output is running about 0.8
billion cubic feet per day lower than the 30-day moving average
and is off 1.5 bcfd from the start of this year when
temperatures were more moderate, according to Thomson Reuters
Analytics which sees current U.S. pure dry gas production of
65.2 bcfd.
    
    PRICES DIP AFTER RALLY
    March futures on NYMEX settled 9.9 cents lower at
$4.931 per million British thermal units on Thursday after
jumping more than 7 percent earlier in the session. Prices
remain not far from the four year highs hit earlier this month.
    In the cash market, gas for Friday delivery at Henry Hub,
the benchmark supply point in Louisiana, traded as high as $9
per million British thermal units early on Thursday, its highest
since August 2008, before retreating to $7.18 by the end of the
day. The hub closed at $7.91 on Wednesday. 
    Late deals were seen $1.34 above the front month. The spread
between the front-month futures and the next-day contract at the
Hub earlier Thursday jumped to its widest level since at least
February 2003, according to Reuters data.
    Cash prices across the U.S. Midwest and West touched record
highs on Wednesday as cold weather hit and pipelines reached
capacity, but fell back on Thursday.
    In key consuming regions, gas on New York's Transco Zone 6
pipeline E-TSCO6NY-IDX fell $3.85 to $18.02 per mmBtu from
$21.87 on Wednesday, while Chicago prices MC-CHICIT-IDX dipped
to $9.01 from $26.73 on Wednesday, traders said.
    

 (Reporting by Scott DiSavino, Writing by Edward McAllister,
Editing by Sophie Hares, Lisa Von Ahn, Sofina Mirza-Reid, Nick
Zieminski and Chris Reese)
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