Natural Gas

Overview: Thursday, April 19, 2007 (next release 2:00 p.m. on April 26, 2007)

With winter-like conditions finally moving toward the moderate temperatures (and less heating demand) of spring, natural gas spot prices have eased across most of the country. During the report week (Wednesday–Wednesday, April 11-18), the Henry Hub spot price declined 42 cents per MMBtu to $7.54. At the New York Mercantile Exchange (NYMEX), prices for futures contracts also were lower. The futures contract for May delivery decreased 35.8 cents per MMBtu on the week to $7.497. Working gas in storage as of Friday, April 13, was 1,546 Bcf, which is 22.1 percent above the 5-year (2002-2006) average. The spot price for West Texas Intermediate (WTI) crude oil increased $1.16 per barrel on the week to $63.14, or $10.89 per MMBtu.  

Prices:

The natural gas market may have finally settled into a shoulder season trading pattern characterized by soft demand from the lack of weather extremes. A cold weather front in the Northeast sustained winter-like conditions for several days further into the spring, but this Nor'easter storm only temporarily boosted space-heating demand. In any event, the storm's temporary effects did not lend enough support to offset generally declining prices. With nothing but springtime weather once again dominating weather forecasts for much of the country, the average price at the Henry Hub was level or falling in four of the past five trading sessions. For the report week, the Henry Hub price posted a decline of more than 5 percent, falling to an average of $7.54 per MMBtu. Price changes were largest in the West, where changes in the weather likely have resulted in less space-heating demand. In the Rockies, the average price at the end of the report week was $6.00 per MMBtu. Except for one market where prices increased, the average price decrease in the Rockies was 76 cents per MMBtu. Although not necessarily reflected in western prices, transportation and storage constraints have lessened in the region, allowing suppliers access and more flexibility to reach destination markets. For example, both Kern River Gas Transmission and Southern California Gas in recent days ended high line-pack Operational Flow Orders (notices to shippers of anticipated reduced flexibility in operations). Operations at Questar's Clay Basin storage field have returned to normal after a temporary outage for part of the week. After a cold weekend, more moderate weather has moved into the Northeast, and prices for deliveries into New York City (Transcontinental Gas Pipe Line Zone 6) yesterday averaged $8.71 per MMBtu, a decline of 28 cents for the week. For the Northeast region as a whole, the average price decline was 41 cents per MMBtu. The Northeast region this week continued to have the highest prices in the country, averaging $8.38 per MMBtu as of Wednesday, April 18.  

With forecasts of moderating temperatures for the remainder of April, futures prices eased this week at the NYMEX. The NYMEX contract for May delivery declined in three of the five trading sessions, resulting in a net decrease of 35.8 cents to $7.497 per MMBtu. All futures contracts through the end of the next heating season also declined on the week. As a result, the price of the 12-month strip, or the average price for contracts over the next year, decreased by 31.0 cents per MMBtu, or 3.5 percent, to $8.490. The price of the near-month contract is more than 50 cents per MMBtu lower than last year's price at this time (on April 18, 2006, the May contract settled at $8.008 per MMBtu). However, the price of the May 2006 contract experienced a steep decline in its final days of trading. The May 2006 contract ended up expiring at $7.198, which is 29.9 cents lower than yesterday's closing price for the May 2007 contract. Not unlike last year (and notwithstanding storage activity in the past week), storage supplies are generally viewed as ample at this time. At this time last year, the difference between the Henry Hub price and the price for the NYMEX contract for delivery the following January (the month that is normally the highest price in the 12-month strip) had widened to $4.25 per MMBtu, a spread that was highly unusual. The corresponding spread this year is still atypically high, but is more narrow at $2.162 per MMBtu. Currently, the January 2008 contract is priced at $9.702 per MMBtu.    

Recent Natural Gas Market Data  

 Storage:

Working gas in underground storage was 1,546 Bcf as of April 13, which is 22.1 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 net change for the report week was a withdrawal of 46 Bcf, which reduced the difference between current storage inventories and the 5-year average (2002-2006) level for this time of year. Although injections into underground storage are the norm for April (the first month following the traditional heating season of November through March), net withdrawals have occurred occasionally in the past as late season cold fronts move through market areas. For example, in 2003, storage activity for the week ending April 11 resulted in a net withdrawal of 46 Bcf as well. This report week's withdrawal along with the 46-Bcf decline in 2003 is the largest withdrawal recorded in April in EIA's 13-year database of weekly storage activity reports. This report week's implied net withdrawal came during a week in which the weather for the country as a whole was the coldest since the first week of March and about 57 percent colder than normal, as measured by heating degree-days (HDDs) published by the National Weather Service (see Temperature Maps). Key markets for space heating demand were considerably cooler than normal. In the Census Divisions of the Northeast and Midwest regions, HDDs were at least 40 percent more than normal.

Other Market Trends:

EIA Releases Report on Foreign Ownership of Energy Enterprises in 2004: The Energy Information Administration (EIA) released a report on April 18, titled Foreign Direct Investment 2004, describing the role of direct foreign ownership of U.S. energy enterprises with respect to their energy operations, capital investments, and net foreign investment flows (including net loans). Foreign direct investment (FDI) in the United States is defined as the ownership or control, directly or indirectly, by one foreign investor of 10 percent or more of the voting securities of an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S. business enterprise (or asset). The report also examined the patterns of direct investment in foreign energy enterprises by U.S.-based companies. According to the report, the share of crude oil and natural gas production by FDI affiliate companies declined slightly in 2004 to15 percent of U.S. crude oil and 12 percent of U.S. natural gas. Additionally, the share of U.S crude oil distillation capacity owned by FDI affiliates declined slightly to 27 percent in 2004, primarily as a result of the divestiture of one refinery. The report also stated that net capital flows into the U.S. petroleum and natural gas industry by foreign direct investors averaged $14 billion per year from 1999 to 2004.  Direct investment in petroleum and natural gas production abroad by U.S. direct investors averaged $9 billion per year over the same period. The combined production of crude oil and natural gas liquids and of natural gas in the United States by FDI affiliates of foreign direct investors declined faster than the total U.S. production of oil and natural gas in 2004, leading to declining production shares for FDI affiliates. These declines were in part the effect of Hurricane Ivan and other hurricane activity in the Gulf of Mexico. The largest contributors to the decline, subsidiaries of BP (United Kingdom) and Royal Dutch/Shell (at that time, Netherlands and United Kingdom), both have substantial operations in the Gulf.  

New Tunnel Planned Under Bering Strait: Viktor Razbegin, the deputy head of industrial research at the Russian Economy Ministry, announced at a briefing on April 18 that Russia plans to build a tunnel under the Bering Strait to Alaska as part of a $65 billion project to supply the United States with oil, natural gas, and electricity from Siberia. The tunnel, which would be the world's longest, would take 10 to 15 years to complete and would be a coordinated effort between Russia, the United States, and Canada. Furthermore, a partnership of state organizations and private companies would build and control the route, known as the TKM-World Link. A planned 3,700-mile transportation corridor from Siberia into the United States would feed into the tunnel, which at 64 miles would be more than twice as long as the underwater section of the Channel Tunnel between Britain and France, according to the plan. The tunnel would run in three sections to link the two islands in the Bering Strait between Russia and the United States. The planned undersea tunnel would contain a high-speed railway, highway, and pipelines, as well as power lines and fiber-optic cables.  

Natural Gas Transportation Update:

• Forecasts of high temperatures and low linepack led Florida Gas Transmission Company to issue an overage alert day (OAD) for market area customers for Wednesday, April 11. The OAD carried a 25 percent tolerance for negative daily imbalances and was in effect until Monday, April 16.
• Tennessee Gas Pipeline Company declared a force majeure on Thursday, April 12, for meters on the West Delta 527A-300 line as a result of repair work. Tennessee asked that operators and producers keep physical flow and scheduled volumes at zero until further notice for Venice, West Delta 58C, and West Delta 58D meters.
• Transcontinental Gas Pipeline Corporation (Transco) announced on Friday, April 13, that it would conduct smart pig operations on 79 miles of mainline A from compressor station 40 near Sour Lake, Texas, to compressor station 45 near Lake Charles, Louisiana. The pig run took place on April 18, which limited physical receipts and deliveries downstream of compressor station 40 for gas days April 17-18, Interruptible and secondary firm transportation was not available during the pig run, and due pipeline imbalances were not allowed. Additionally, firm transportation receipts downstream of station 40 were limited to 200,000 decatherms (Dth) per day.
• Northwest Pipeline Corporation reported that nominations through Kemmerer and La Plata B compressor stations recently exceeded their design capacity by as much as 40,000 and 16,000 Dth per day, respectively; necessitating a warning to all shippers that excess capacity will become increasingly difficult as the weather warms up. Continuing excess nominations could reduce Northwest's ability to reliably operate its system and preserve its system flexibility. The pipeline requested that its customers voluntarily reduce their nominations to design capacity through these two compressor stations so that an operational flow order (OFO) could be avoided over the coming months.

Short-Term Energy Outlook