Natural Gas

• Natural gas spot prices fell at most pricing point locations across the board in the lower 48 States as demand fell. The price at the Henry Hub fell 25 cents, or about 7 percent, since last Wednesday, September 29, from $3.81 per million Btu (MMBtu) to $3.56 per MMBtu.
  
• The West Texas Intermediate crude oil spot price settled at $83.21 per barrel, or $14.35 per MMBtu, on Wednesday, October 6. This represents an increase of $5.36 per barrel, or $0.92 per MMBtu, from the previous Wednesday.
  
• Working natural gas in storage increased to 3,499 billion cubic feet (Bcf) as of Friday, October 1, according to the Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report. Inventories are 220 Bcf greater than the 5-year (2005-2009) average for this time of year.
• At the New York Mercantile Exchange (NYMEX), the November 2010 contract fell about 10 cents or 2 percent from the $3.962 per MMBtu the previous Wednesday to $3.865 yesterday.
  
• The natural gas rotary rig count, as reported on October 1 by Baker Hughes Incorporated, fell by 5 from 967 to 962. Though this is the second week in a row the rig count has fallen, natural gas rigs have oscillated somewhat, from 947 on June 4 to 992 on August 13, over the past few months.

Spot prices fell across the board from last week, with declines ranging between 6 cents and 34 cents, or about 1 percent and 9 percent. The 6-cent decline (at Iroquois Zone 2 in the Northeast) was somewhat of an anomaly; declines in most regions averaged in the range of 20 — 25 cents. At the Henry Hub, the natural gas spot price dropped from the previous Wednesday by 25 cents to end trading yesterday at $3.56 per MMBtu. While spot prices have fallen over the past couple of weeks, the Henry Hub price remains about 10 percent above the spot price one year ago. On a few occasions in early October 2009, the Henry Hub price settled below $3 per MMBtu.

The decline in prices corresponded with a drop in natural gas demand. According to estimates from BENTEK Energy Services, LLC, overall consumption fell by 2 percent from the previous week. A decline in electric power consumption of 21 percent, likely the result of milder temperatures reducing the need for cooling, was the driving factor behind the overall decrease in consumption. The decline was partially offset by a 32-percent increase in consumption for natural gas for residential and commercial use, likely the result of cooler temperatures increasing heating consumption in some areas of the United States. Specifically, in some areas of the Upper Midwest, average temperatures dropped into the 40s; even in these areas, prices did not post a net weekly gain. Prices increased slightly at most locations from Tuesday, October 5 to Wednesday, October 6, likely the result of the cooler weather. Otherwise during the report week, prices across the country generally fell each day, with the largest drops occurring on Friday, October 1.

Prices this week fell in the Rocky Mountains as temperatures moderated in California, reducing demand for cooling. Last week, on the other hand, prices rose in the Rockies, likely due to extremely hot temperatures in some areas of California increasing consumer demand for cooling. At the Northwest Sumas trading point in the Rocky Mountains, prices posted the largest decrease in the country this week, falling from $3.61 per MMBtu from the previous Wednesday to $3.27 per MMBtu yesterday. Similarly, declines at other trading points in the Rockies ranged between 12 cents and 28 cents.

According to BENTEK estimates, supply of natural gas fell this week as well. Even though production remained virtually flat (though still very robust compared to recent history), LNG sendout and imports were down, causing overall supply to decline. LNG sendout fell below its 5-year (2005-2009) minimum on several days during the report week. The low LNG sendout was likely the result of low demand, strong domestic production, and strong natural gas prices abroad relative to the United States. Additionally, imports from Canada to the United States also fell by about 7 percent from the previous week.

At the NYMEX, the price of the November 2010 contract fell about 10 cents, from $3.962 per MMBtu to $3.865 per MMBtu. During intraweek trading, prices had fallen even lower, settling at $3.727 per MMBtu on Monday, October 4, 2010. The November 2010 contract is about a dollar below the price of the November 2009 contract on October 6, 2009; the differential between spot and futures prices is much narrower than it was around this time last year. This week, the 12-month strip (the simple average of the 12 futures contracts between November 2010 and October 2011) rose slightly, from $4.328 per MMBtu to $4.366 per MMBtu. The November 2010 contract was the only one to lose value on the week; the remainder of contracts in the 12-month strip all rose from Wednesday to Wednesday, though by small amounts ranging from less than $0.01 to $0.07.

Working natural gas in storage increased to 3,499 Bcf as of Friday, October 1, according to EIA’s Weekly Natural Gas Storage Report (see Storage Figure). The implied net injection was 85 Bcf, compared with last year’s net injection of 68 Bcf and the 5-year average of 67 Bcf for the report week. Working gas inventories are currently 149 Bcf below year-ago levels but 220 Bcf above the 5-year average level.

Despite a run of summer injections well below last year’s levels, due largely to warmer-than-normal temperatures and the corresponding increase in natural gas burn for the power sector, natural gas stocks have been building at a rapid pace recently due to high production and mild shoulder-season weather. In fact, this is the fourth consecutive week that the storage injection has exceeded both last year’s implied net injection and the 5-year average implied net injection. EIA expects that working gas in storage will end the injection season with levels of 3,687 Bcf at the end of October, as reported in the September Short-Term Energy Outlook.

Temperatures were warmer than normal in most of the Census Divisions in the lower 48 States during the week ending September 30. Temperatures in the lower 48 States during the week ending September 30 averaged 67.9 degrees, 4.3 degrees warmer than normal and 2.8 degrees warmer than temperatures last year (see Temperature Maps and Data). Only the West South Central and West North Central Census Divisions reported slightly cooler-than-normal temperatures in the lower 48 States. In contrast, temperatures in the New England, Mountain, and Pacific Census Divisions were over 9 degrees warmer than normal.

Oil and Gas Well Costs Fell in 2009. Oil and Gas Lease Equipment and Operating Costs 1994 through 2009, released by EIA on September 28, reports that costs rose from the 1990s through the late 2000s but fell sharply in 2009. An extreme decline of oil prices led to a reduction of demand for equipment and an operating cost decline. Costs nevertheless remain at relatively high levels in both real and nominal terms as compared to the early 2000s and the 1990s. The report notes that in the 1976-2009 period, the real costs of both natural gas equipment and operations have changed less over time than has the real price of natural gas. The report also notes that from 1976 to 2008, the 77 percent real increase in oil operating costs and the 22 percent real increase in equipping cost were dwarfed by the 274 percent increase of the real oil price, a differential that’s only slightly less dramatic after 2009’s 46 percent oil price decline.

Interior Department Issues Regulations to Strengthen Drilling Safety. On September 30, the U.S. Department of the Interior issued two new regulations intended to strengthen offshore drilling safety. The Drilling Safety Rule and the Workplace Safety Rule are the latest in a series of reforms undertaken by the Department of the Interior since the Deepwater Horizon rig explosion in April.

The Drilling Safety Rule includes the following among its provisions:

Requires measures to strengthen well bore integrity and prescribes appropriate use of drilling fluids.

The Workplace Safety Rule includes the following among its provisions:

Requires operators to have a Safety and Environmental Management System (SEMS), a comprehensive safety and environmental impact program designed to reduce human and organizational errors that cause work-related accidents and offshore oil spills.

More information about these programs is available here: http://www.doi.gov/news/pressreleases/Salazar-Announces-Regulations-to-Strengthen-Drilling-Safety-Reduce-Risk-of-Human-Error-on-Offshore-Oil-and-Gas-Operations.cfm

• In the Northeast, operators of pipelines are responding to lower demand on their systems as summer heat dissipates. Citing limited operational flexibility and mild weather, Tennessee Gas Pipeline Company is requiring shippers to maintain an actual daily flow rate not exceeding 2 percent of scheduled quantities or 500 decatherms (Dth), whichever is greater, for overdeliveries into the system and undertakes from the system. Separately, the pipelines owned by Spectra Energy Corporation also said that they will limit flexibility for shippers this weekend because of forecasted lower demand. Effective Friday, October 08, 2010, the company’s pipeline systems in the Northeast will require all delivery point operators to keep their nominations in balance. The restriction affects the operations of Maritimes and Northeast Pipeline, LLC; East Tennessee Natural Gas, LLC; Texas Eastern Transmission, LP; and Algonquin Gas Transmission, LLC.
• Gulf South Pipeline Company, LP, on Tuesday revealed plans to perform maintenance at its compressor station in Hall Summit, Louisiana, for four days beginning Tuesday, October 12. Station capacity, which is normally about 350,000 Dth per day, may be reduced by as much as 100,000 Dth per day at this time, according to Gulf South.
  
• Because both compressors owned by Enterprise Product Partner, L.P., and El Paso Natural Gas Company (El Paso) are undergoing maintenance at the Waha hub in West Texas, flows through the hub will be dependent on pressure at interconnections, El Paso Natural Gas Company said on Tuesday. The turbines powering the compressor units at the hub are inactive because of maintenance through today, October 7. El Paso noted that 8 interconnects will receive/deliver volumes at Waha, subject to the pressure limitations.
  
• Kern River Gas Transmission on Tuesday said it was completing required equipment installations at its compressor station in Veyo, Utah, through today. This is limiting Veyo capacity to 2,090,000 Dth per day, slightly less than the average daily scheduled quantity at Veyo of 2,121,440 Dth per day during the first half of September, according to the pipeline company.
  
• Southern Natural Gas Company on Monday said that it will lose 64 percent of its available injection capability during a shutdown test of the Muldon Storage Field in Mississippi that began Tuesday, October 5. The shutdown will last through Monday, October 11.

See Weekly Natural Gas Storage Report for additional Natural Gas Storage Data.
See Natural Gas Analysis for additional Natural Gas Reports and Articles.
See Short-Term Energy Outlook for additional Natural Gas Prices, Supply, and Demand.