Natural Gas

Overview: Thursday, June 17 (next release 2:00 p.m. on June 24)

Summer heat in the West and a nuclear plant outage reversed the recent downward trend in natural gas spot prices, resulting in across the board increases this week (June 9–June 16). The Henry Hub spot price increased 34 cents per MMBtu on the week to $6.39, while gains in the West ranged up to 71 cents. After dropping to a 6-week low of $6.082 per MMBtu earlier in the week, the NYMEX futures contract for July delivery increased in the last four consecutive trading sessions to yesterday's (Wednesday, June 16) closing price of $6.489, a net gain of almost 41 cents per MMBtu. Natural gas in storage as of Friday, June 11, totaled an estimated 1,760 Bcf, which is 0.5 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil fell 27 cents per barrel on the week to yesterday's price of $37.33 per barrel, or $6.44 per MMBtu.

Prices:

Prices increased from 29 to 71 cents per MMBtu at spot market locations since last Wednesday, June 9, as hot weather in the West and a major nuclear plant outage likely spurred increased natural gas demand to meet larger cooling requirements. Spot prices increased this week despite declining crude oil prices, which have supported higher energy prices in general this spring. The Henry Hub spot price increased in three of the four trading sessions this week (there was no trading on Friday, June 11, in observation of a day of mourning for the late President Reagan), trading yesterday at $6.39 per MMBtu, or 34 cents higher than last Wednesday (June 9). Similar increases of 30 to 45 cents per MMBtu occurred throughout most producing areas in the Southwest and Mid-continent. Meanwhile, the largest price increase in the Lower 48 States since last Wednesday occurred at the Southern California Border market, where relatively warm weather resulted in a price increase of 71 cents per MMBtu. Prices throughout the West rose on Monday following the announcement of the outage of the Palo Verde nuclear plant in Arizona after a regional "grid disturbance." In the Rockies, the spot price at Opal, Wyoming, where gas transportation to Southern California is provided via Kern River Gas Transmission, increased 56 cents per MMBtu to $5.51. For the first time in June, Northeast prices rose above $7 per MMBtu as hotter weather moved into the region on Wednesday, June 16. The largest week-to-week price increase in the Northeast occurred for deliveries off Algonquin Gas Transmission, which serves the Boston area, as well as points farther south in the Northeast. The Algonquin price increased 54 cents per MMBtu to $7.03.

At the NYMEX, the price of the futures contract for July delivery at the Henry Hub increased by $0.407 per MMBtu since Wednesday, June 9, to settle at $6.489 per MMBtu yesterday. The near-month contract price last Wednesday reached its lowest level ($6.082) since late April, before increasing in each of the following four trading sessions. At a price of $6.489 per MMBtu, the July contract is about $1.20 per MMBtu, or 23 percent, higher than the expiration price of the July 2003 contract. On the week, contracts for winter delivery (December 2004 through February 2005) rose slightly less than the near-month contract at an average of 33 cents per MMBtu. Currently, the highest priced contract over the next year is the January 2005 contract, which closed yesterday at $7.077 per MMBtu, a nearly 69-cent premium to the spot Henry Hub price, providing a strong incentive for industry to store gas for next winter.

Recent Natural Gas Market Data

Storage:

Estimated working gas in underground storage was 1,760 Bcf as of June 11, which is 0.5 percent above the 5-year average inventory level for the report week, according to EIA's Weekly Natural Gas Storage Report (See Storage Figure). The implied net injection for the week was 94 Bcf, which is 13 percent greater than the 5-year average implied net injection of 83 Bcf. As a result of the relatively robust injection, total inventories are now above the 5-year average for the first time since January 2004. During the report week, the weather for the country as a whole was about 21 percent warmer than normal, as measured by cooling degree days (CDDs) for the week ending June 12, according to the National Weather Service (See Temperature Map) (See Deviations Map). Temperatures in major market areas for gas-fired electric generation were mixed. CDDs in the Pacific census region (including California) were about 5.5 percent below normal, while CDDs numbering more than 75 percent above normal in the East North Central region likely increased demand during the week.

Other Market Trends:

Geopolitical Importance of Natural Gas: Natural gas is rapidly gaining in geopolitical importance and is emerging as the fuel of choice worldwide for those seeking energy resources that will mitigate environmental impact, especially for electric power generation. These are major findings of a two-year study conducted by the James A. Baker III Institute for Public Policy of Rice University and the Program on Energy and Sustainable Development at Stanford University that was announced on May 27. A major conclusion of the study is that a shift is taking place today from a world of regionally isolated natural gas markets to an international, interdependent global market. The shift to a global market will make each major consuming or producing region vulnerable to events in other regions. Governments' role in the coming decades regarding the development of a global gas market also will change, and greater attention will be paid to supply security as the geopolitical importance of natural gas increases. About three fourths of the world's proven gas reserves are in the former Soviet Union and the Middle East, but the demand for gas is expected to rise most rapidly in North America and Europe, with new markets developing in China, South Asia, and Latin America. Developments spurring the integration of gas markets include increasing demand, technological advances, market liberalization, and cost reductions in producing and delivering LNG to markets.

Natural Gas Is Preferred Source of Home Heating: According to the Census Bureau's latest report, "Characteristics of Housing," 67 percent of new housing in 2003 (which includes single-family houses and multi-family units) has been equipped with gas heat. Natural gas was the preferred source of heating for seven out of ten new single-family houses and 51 percent of new multi-family units in the United States. The share of new gas-heated multi-family units is up from 45 percent in 2002. Last year was the first time since 1994 that the percentage has been above 50 percent. Natural gas is the fuel of choice for heating new single houses and new multi-family units both regionally as well as nationwide. The shares of new single-family homes and new multi-family units heated by natural gas have increased in all regions in the United States. The largest increase, 7 percent, was in the Northeast region where it reached 77 percent. The largest share of gas-fired new home construction occurred in the West and Midwest, where new homes utilizing gas reached 88 percent. In the South, new home construction heated by natural gas was 43 percent, reflecting a 1 percent increase from 2002. According to Census data, nationwide, 52 percent of Americans heat their homes with gas, followed by electricity, and then propane.

Summary:

Natural gas prices at spot market locations increased 29 to 71 cents per MMBtu owing to hotter temperatures and the outage of a major nuclear power facility in the West. The NYMEX price for July delivery at the Henry Hub climbed $0.407 per MMBtu to a close of $6.489 on Wednesday, June 16. As of June 11, inventories were an estimated 1,760 Bcf, which is a net increase of 94 Bcf from the previous week. This week's storage report marked the first time since January 2004 that inventories were above the 5-year average.

Natural Gas Summary from the Short-Term Energy Outlook