Gas Market Update (August 29, 2012)

Natural gas prices fell to a two-month low on speculation that production cuts in the Gulf of Mexico as a result of Tropical Storm Isaac will have a minimal effect on the current supply glut.

The National Hurricane Center confirmed that Isaac is set to become a Category 1 hurricane before reaching New Orleans on Wednesday.

Prices fell last Friday as reports indicated that Isaac was moving from storm to hurricane status, according to The Wall Street Journal. Weekend forecast revisions that called for Isaac to hit the producing region as a potential Category 2 hurricane resulted in the evacuation of oil and gas facilities and the shut down of around 371 million cubic feet of gas output, the equivalent of 8.24 percent of the region’s flow.

The Wall Street Journal added that offshore Gulf of Mexico gas output plays a smaller role in supplying the United States than it did in the past. In 2005, daily output from the Gulf was 10.1 billion cubic feet, or 15.4 percent of total US output. This figure now stands at 4.3 bcf a day, or 5.2 percent of national output.

Earlier this week, Williams Companies (NYSE:WMB) told Reuters that Gulf of Mexico natural gas producers have shut approximately 500 million cubic feet of output into the Transco natural gas pipeline system due to the storm.

The company also said the Southeast Louisiana Lateral will be isolated and shut in at station 62 near Gibson, Louisiana. “All production upstream of station 62 that is not currently shut in will need to do so as soon as possible,” said a website posting.

The US Energy Information Administration said in a report last week that natural gas storage in the US rose by 47 billion cubic feet last week, above market expectations of 38 billion cubic feet.

On the New York Mercantile Exchange, gas futures for September delivery fell to $2.653 per million British thermal units (mmBtu) — the lowest settlement level since June 22.

Natural gas for next-day delivery at the benchmark Henry Hub in Louisiana recently traded at $2.77/mmBtu, according to Lloyds. Natural gas for next-day delivery at Transcontinental Zone 6 in New York traded at $2.95/mmBtu, up from $2.86/mmBtu.

Total US gas supplies stood at 3.308 trillion cubic feet last week — 14.7 percent above last year’s level and 12.1 percent above the five-year average for the week.