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US Gas Futures Hit 11-Month Low On Storage Build, Weak Demand

August 27th, 2010

(Dow Jones) – Natural gas futures fell to their lowest level in 11 months Thursday on a larger-than-expected increase in U.S. gas storage as summer weather comes to an end.

Natural gas for September delivery settled down 5.4 cents, or 1.4%, at $3.817 a million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Sept. 28. Futures touched as low as $3.791/MMBtu in intraday trading as the market posted its seventh consecutive day of losses.

U.S. gas inventories grew by 40 billion cubic feet in the week ended Aug. 20, the federal Energy Information Administration said Thursday, slightly more than analysts and traders had forecast. Driving the higher-than-expected injection was the first signs of fall weather in the eastern U.S.

“We are getting into a time of year where the demand tends to dry up,” said Stephen Schork, president of The Schork Group, a Villanova, Pa., energy advisory firm.

Gas in U.S. storage for the week stood at 3.052 trillion cubic feet, 6.2% above the five-year average, but below year-ago levels. The storage report fell short of last year’s 53-bcf build for the same week and five-year average build for that week of 59 bcf.

Inventory builds this summer have been below average as unusually hot weather diverted supplies that would typically be headed into storage to gas-fired power plants. Hot weather can increase electricity use to power air conditioning to cool homes and businesses. But gas futures have fallen more than 20% in August, signaling that market participants are betting the heat-related demand spikes have passed and robust production from onshore shale-rock formations continues.

“You have a lot of supply out there,” said Cameron Horwitz, an analyst with SunTrust Robinson Humphrey in Houston.

He added that if gas prices continue to decline going into autumn, producers will likely cut back on the number of rigs drilling for gas. Oil-field services company Baker Hughes Inc. said last week that there were 985 gas rigs drilling in the U.S., up 42% from the same week in 2009.

Prices have also come under pressure from a calm hurricane season as storms so far have missed the major energy infrastructure in the U.S. Gulf of Mexico. The energy-rich region represents about 11% of domestic gas output, and prices can rise sharply if storms enter the gulf.

Jim Rouiller, senior energy meteorologist with the private forecasting firm Planalytics, said threats to the gulf remain, writing in a note to clients Thursday that he’s “beginning to feel more and more confident that the Gulf and Florida will become targets for hurricane strikes as we approach and move through the Labor Day weekend.”

The National Hurricane Center on Thursday said Hurricane Danielle would continue north, avoiding the gulf. The storm system behind Danielle, tropical storm Earl, is also expected to remain northeast of the Caribbean.

FUTURES                   SETTLEMENT                   NET CHANGE
Nymex Sep                      $3.817                                   -5.4c
Nymex Oct                       $3.843                                   -5.3c
Nymex Nov                      $4.093                                    -3.9c

CASH HUB                   RANGE                   PREVIOUS DAY
Henry Hub                  $3.73-$3.89              $3.87-$4.02
Transco 65                   $3.80-$3.89              $3.91-$4.00
Tex East M3                $4.04-$4.13              $4.15-$4.28
Transco Z6                  $4.07-$4.15              $4.18-$4.27
SoCal                          $3.56-$3.63               $3.64-$3.74
El Paso Perm              $3.49-$3.59               $3.60-$3.69
El Paso SJ                  $3.40-$3.47               $3.48-$3.58
Waha                           $3.50-$3.63               $3.65-$3.76
Katy                              $3.82-$3.96               $3.92-$4.03

____

By Matt Day

Glossary Terms

Glossary Terms

Nominated Volume

The physical quantity of gas requested, typically in MMBtu/day, for a specific contract or for all contracts at a specific point.

Marketing Affiliate

A marketing company that has corporate ties to an interstate pipeline, an intrastate pipeline, or a local distribution company.

Energy Only Providers

Power marketers or other electricity vendors who provide and bill for only the energy component of the electricity consumed by the end-use customer.

Therm

A unit of heating value equivalent to 100,000 British thermal units (Btu).

Real Power

The component of electric power that performs work, typically measured in kilowatts (kW) or megawatts (MW)--sometimes referred to as Active Power.

Injection (Storage)

The process of delivering natural gas into a storage field for future delivery and use.

Price Ceiling

Statutory maximum lawful prices for various categories of natural gas, including gas destined for both the intrastate and interstate markets.

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