Gas Market Update (October 10, 2012)

With Qatar exporting leftover short-term deliveries to the UK and sending an increasing majority of its liquefied natural gas (LNG) to higher paying Asian customers, Britain could be in danger of suffering a long-term loss of LNG supply, according to Reuters.

Analysts and British energy companies have stated that the strategy rewards Qatar, but puts Britain at a significant disadvantage. Qatari shipments provided a quarter of Britain’s gas needs in 2011.

“Preliminary estimates for the first half of 2012 suggest that LNG imports in Europe were down a quarter compared to the same period of 2011, with the UK reduction close to 43 percent,” energy consultants Wood Mackenzie said in a research report.

US natural gas futures edged higher on Monday in mixed trading, supported by dropping temperatures that have stimulated early heating demand. Meanwhile, record high supplies and a milder mid-month weather outlook limited the upside.

The front-month contract, which posted a 2012 high of $3.546 per million British thermal units (MMBtu) last week, has risen nearly 20 percent in the last two weeks as traders anticipated the season’s first cold snap. With inventories at record highs for this time of year and production near an all-time high, most traders have issued caution on the upside, particularly with the early chill expected to be short-lived.

“It’s all about weather and this is the first good slug of (cold) weather we’ve had. But (longer-term) forecasts don’t look that supportive,” said Tom Saal at INTL FCStone in an interview with Reuters.

The November natural gas contract gave back most of its gains from the previous session and is down a cent to $3.40/MMbtu on NYMEX. On the US spot market, gas at Henry Hub fell four cents to $3.19/MMbtu.

Baker Hughes data shows that the gas-directed rig count rose by two last week, to 437, after sliding to a 13-year low two weeks ago. It was the second gain in three weeks, but only the eighth time this year that the gas rig count has risen. The count is still down 53 percent since peaking at 936 last October.

Data released by the US Energy Information Administration last week shows that domestic gas inventories for the week rose by 77 billion cubic feet (Bcf) to 3.653 Tcf. At 86 percent capacity, storage is hovering at a level not normally reached until the last week of October, offering a significant surplus that will be used to offset any weather-related spikes in demand.

Boone Pickens, a well-known energy investor that chairs the hedge fund BP Capital Management, has forecast that natural gas prices will move up to $4 per MMBtu by the end of 2012 from the current price of $3.20 per MMBtu.