Natural Gas

Overview:

Spot prices for natural gas appeared to stabilize just above the$3.00 mark during the week ended August 10, 2001, as the price at the Henry Hub in Louisiana varied between $3.14 and $2.98 per million Btu.Net injections of natural gas into storage for the previous week again fell within the range of market expectations reported in the trade press and contributed to the stability of the price level.However, due to warmer-than-normal temperatures in the Northeast, Midwest, and parts of the Southwest and Southeast, prices at the Henry Hub increased early in the week before decreasing and finishing over 2 percent lower than the previous week.(See Temperature Map) (See Deviation from Normal Temperatures Map). The price of West Texas Intermediate (WTI) crude oil finished the week at $28.10 per barrel or $4.84 per million Btu, an increase of almost 2 percent above the previous Friday.

Prices:

The threat from Tropical Storm Barry dissipated as it was downgraded to a tropical depression shortly after making landfall in the Florida panhandle on Sunday night August 5, without having any apparent lasting effect on production or prices.However, above-normal temperatures throughout much of the country caused spot prices to increase early in the week before coming back down as the week progressed.Spot prices peaked on Tuesday at the Henry Hub, Chicago, northern California (PG&E), and southern California (SoCal) at $3.14, $3.18, $3.40, and $3.65 per million Btu, respectively.Spot prices in New York, which faced record high temperatures, continued to rise through Wednesday and peaked at $4.14 per million Btu.However, a predicted cold front that moved into the Northeast later in the week brought[jt11]  cooler temperatures and helped lower demand and prices.For the week, spot prices finished lower on Friday than the prior week in many parts of the country.Prices at the Henry Hub, SoCal, and PGE&E continued their movement toward more typical relative patterns throughout the week.The basis differential between the Henry Hub and SoCal averaged $0.37 per million Btu, and $0.17 per million Btu between the Henry Hub and PG&E, which approached their historical averages prior to November 2000 of about $0.21 and $0.13 per million Btu, respectively. In contrast, the spot price in New York diverged sharply from the Henry Hub as the basis differential between the points grew to about $1.05 on Wednesday. However, the New York citygate spot price finished the week a little over 1 percent lower than the previous week as markets adjusted and temperatures became more moderate in the Northeast.

The NYMEX futures contract for September delivery at the Henry Hub fluctuated closely around the $3.00 mark.Instead of following the Henry Hub spot price increase early in the week, the September futures contract declined on Tuesday and rose on Wednesday to $3.036 per million Btu before falling again the following day.Although the trade press reported some hopes that prices will rally, with the market awash in supplies and storage at near record levels for this time of the year, the market appears to lack an economic basis to sustain such a rally in futures prices. Prices for September delivery were generally lower than the prevailing cash price during the week by 6 cents. The slight backwardation in near-month prices, however, seems more than offset by the substantial differentials between cash and winter month contracts.As of Friday, prices for December and January delivery exceeded the Henry Hub spot price by $0.636 and $0.765 per million Btu, respectively, providing a clear incentive for continued additions into storage.

Storage:

Net injections into storage were 80 Bcf for the week ended August 3, as estimated by the American Gas Association (AGA), bringing total inventories as of that date to an EIA-estimated 2,342 Bcf—the third largest level since 1995 for this point in the year (See Storage Figure). Net injections were the second highest since 1995 during this week of the refill season in both the East region and the nation as a whole, and were the highest in the West region in the 8-year history of the AGA storage data series.EIA's most current estimate for end-of-July inventories, incorporating AGA's August 3 report, is 2,308 Bcf. If net injections in the months of August through October match the 6-year averages, total stocks as of November 1 will be approximately 3,070 Bcf.However, cumulative net injections during the first 4 months of the refill season (April-July) have exceeded the 6-year average by about 52 percent. If net injections during August-October continue to exceed their averages by a similar margin, total stocks on November 1 will exceed 3,450 Bcf. The largest beginning-of-heating-season level ever recorded by EIA was 3,467 Bcf in 1990.

Other Market Trends:

EIA lowered its forecast for wellhead prices to $3.10 per million Btu for the third quarter of 2001 and $3.50 per million Btu for the fourth quarter of 2001 in the most recent issue of the Short-Term Energy Outlook released on Wednesday.With these reduced estimates, prices are expected to decline over 12 percent in the third quarter of 2001 and almost 26 percent in the fourth quarter of 2001 compared with 2000.The lower prices are due in part to expectations of flat natural gas demand in the second half of 2001, along with expanded supply.Supply is projected to expand strongly, with roughly 3 percent growth in the third quarter and over 5 percent in the fourth quarter.The reduced growth in demand is partly attributed to lower industrial demand.Given the relatively low prices and abundant supplies this summer, EIA projects that the robust pace of net storage injections should continue through the end of the refill season, which will provide needed supplies next winter.

Summary:

Sufficient supplies and net working gas injections within the range of expectations combined to provide stability to natural gas prices despite the extraordinarily high temperatures that prevailed throughout much of the country.Prices at the Henry Hub finished over 2 percent lower than the previous week, while prices for the near-month futures contract finished slightly over 2 percent higher.