Natural Gas

Overview:

From Friday, June 1 to Friday, June 8, cash prices fell again, as cooler-than-normal temperatures prevailed from midweek on in the northern half of the nation as well as in some areas along the Gulf of Mexico (See Temperature Map) (See Deviation from Normal Temperatures Map).Price declines in cash markets ranged from pennies to over $1.00 per MMBtu, with most points down 9-15 cents. At the Henry Hub, the price fell 8 cents to $3.63 per MMBtu. The near-month (July delivery) futures contract lost less than 1 cent for the week, settling on Friday, June 8 at $3.922 per MMBtu. Once again, weekly storage injections topped 100 Bcf, approaching or exceeding regional records for the report week.

Prices:

It was a week of contrasting price movements in cash markets. Spot prices responded on Monday to demand-increasing weather extremes (hot weather in Texas and the Gulf Coast; near-winter temperatures in the Rockies) with increases of 20 cents or more at most locations. Further gains of a nickel to a dime occurred on Tuesday as Tropical Storm Allison headed for landfall in the western Gulf. However, gains began to erode Wednesday with the American Gas Association's (AGA) announcement of storage injections of 117 Bcf. Spot prices continued to trend down for the rest of the week. Allison was no threat to production assets, and her heavy rains and persistent cloud cover over much of east Texas, Louisiana, and southern Arkansas eased utility demand significantly. Price drops were most pronounced in California, where moderate temperatures and adequate electricity supplies obliterated early-week gains.Both PG&E and SOCAL issued high-inventory operational flow orders (OFO) on Friday. On SOCAL, prices were down nearly $6 from their Tuesday highs to $3.54 per MMBtu on Friday. This is the first time since May 2000 that the SOCAL price was less than at the Henry Hub. At Rockies price points, where the effects of warming temperatures, lack of demand in California, and major pipeline maintenance projects had gas backing up throughout the region, prices fell under $2.00 per MMBtu at several locations for the first time since early November 1999. The average spot price in the Rockies on Friday was $1.76 per MMBtu.

The NYMEX contract for July delivery moved in a similar pattern as cash prices until Friday, when it gained $0.132 to settle at $3.922 per MMBtu—virtually unchanged from the previous Friday (June 1). The contracts for gas delivery in future months through the end of the next heating season (March 2002) showed strength, gaining anywhere from a penny to nearly 9 cents per MMBtu over their respective Friday, June 1 settlement prices. These gains came after two consecutive weeks of losses. Futures-contract prices for upcoming heating season delivery ranged from $4.302 (November 2001) to $4.557 per MMBtu (January 2002).

Storage:

Net injections to storage were 117 Bcf during the week ended June 1, 2001, according to the American Gas Association (AGA). Last week's addition was just short of the record 120 Bcf added during the same week of 1994.With the new increment, the national total pulled to within 2.6 percent of the 6-year average (1995-2000) (See Storage Figure). The East was the only region to establish a record last week with a net addition of 70 Bcf, 20 percent higher than the 6-year average. The Producing Region outperformed its 6-year average by 25 percent by adding 29 Bcf, while additions of 18 Bcf in the West were 44 percent higher than the 6-year average. The recovery in the West to 6.7 percent below the 6-year average is particularly notable because stocks were 48.1 percent below average on March 9, 2001.

Other Market Trends:

EIA lowered its forecast for wellhead prices through the summer by about 50 cents to $4.14 per MMBtu in its most recent Short-Term Energy Outlook released Thursday.Even with the downward revision, the price is expected to be 19.7 percent higher than last summer.Barring unusually warm weather, which would raise cooling requirements and affect the wellhead price, the demand for natural gas in the upcoming summer quarter is expected to be 4.9 Tcf, a 4.0 percent increase over last summer.A growth in net imports of 15.4 percent (due to the opening of the Alliance Pipeline for commercial operations in December 2000), in addition to an increase of 3.1 percent in production this summer over last, should allow natural gas stocks to open this heating season above last year's level of 2,699 Bcf.

Summary:

Spot prices continued to fall, as generally seasonal to cooler-than-normal temperatures predominated in most parts of the country and repeated large storage injections continue to narrow the deficit of working gas inventories to the 6-year average.Futures prices ended the week with significant gains.