Natural Gas

Overview:

Since Wednesday, May 22, natural gas spot prices were down at most locations, despite gains ranging between 2 and 14 cents per MMBtu on Wednesday, May 29. For the week, prices at the Henry Hub declined 9 cents to $3.29 per MMBtu, which is a decrease of almost 3 percent. Moderate temperatures and falling crude oil prices contributed to declines in demand for natural gas as neither cooling demand nor heating demand for gas seemed sufficient to avoid the price declines. The NYMEX futures contract for June delivery at the Henry Hub expired yesterday (May 29) at $3.42 per MMBtu. The spot price for West Texas Intermediate (WTI) crude oil decreased $1.37 per barrel or over 5 percent since last Wednesday, trading at $25.64 per barrel or $4.42 per MMBtu.

Prices:

Spot prices declined at most market locations in the Lower 48 States during the past week, driven principally by declines heading into the Memorial Day weekend that could not be completely reversed by the modest increases that occurred following the holiday. On Friday, May 24, prices fell between 14 and 20 cents at most market locations with steeper declines occurring in the Rockies, Midcontinent, and California as demand softened owing to moderate temperatures and light industrial demand over the holiday weekend. Since Memorial Day, prices have climbed, with the largest increases occurring on Wednesday, May 29, as most locations reported gains ranging between 2 and 14 cents. At some Rocky Mountain locations, spot prices increased between 10 and 45 cents yesterday, leading to the only net increases in week-to-week prices in the country, although prices remain lower than elsewhere with the highest reported price in this region at $2.56 per MMBtu. Price declines for the week were the largest in the Midcontinent, where prices fell over 6 percent at most locations. At the Henry Hub in Louisiana, prices fell almost 3 percent to $3.29 per MMBtu.

At the NYMEX, the settlement price of the futures contract for June delivery at the Henry Hub fell by almost 4 cents during the week to a final settlement price of $3.420 per MMBtu. Prices of the futures contracts for delivery during each month remaining in 2002 climbed between 10 and 14 cents per MMBtu on Wednesday, May 29. These increases were driven by both rising crude oil prices, which jumped over 2 percent on Wednesday, and short-covering as many traders likely shifted their positions in the expiring June contract into contracts for delivery further into the future. The price of the futures contract for July delivery at the Henry Hub settled at $3.505 on Wednesday, almost 8 cents higher than the price of the expiring June contract, and nearly 22 cents greater than the Henry Hub spot price. The contract for July delivery begins trading as the new near-month contract today (Thursday, May 30).

Storage:

According to the EIA Weekly Natural Gas Storage Report, net injections into storage in the Lower 48 States were 71 Bcf for the week ended Friday, May 24. This is similar to the 5-year average of 73 Bcf for the report week, and reflects the generally moderate temperatures during that week. (See Temperature Map) (See Deviation Map). Last year's injection of 87 Bcf during the same report week was the highest since 1994. The year-over-year surplus of working gas in storage fell by 16 Bcf to 442 Bcf during the week. Nevertheless, total stocks remain over 300 Bcf or nearly 22 percent above the 5-year average. With the stock build proceeding close to historical averages, and the current level exceeding the 5-year maximum level, it appears likely that the level of gas in storage will be sufficient for the upcoming heating season. (See Storage Figure)

Other Market Trends:

FERC Investigates Natural Gas Wash-Trading: The Federal Energy Regulatory Commission (FERC) has expanded its investigation into "wash-trading" activities to include natural gas transactions. FERC, which earlier launched an investigation into such trading by electric power marketers, has given all sellers of natural gas in the U.S. portion of the Western Systems Coordinating Council and/or Texas during the years 2000-2001 until June 5, 2002, to "admit or deny" engaging in wash-trading activities. FERC defines wash-trading as involving the "sale of natural gas together with a simultaneous purchase of the same product at the same price." The practice, which has also been called "round-trip" and "sell/buyback" trading, has drawn the attention of regulators for possibly contributing to the manipulation of natural gas and electricity prices. If companies admit to wash-trading, FERC instructed them to provide "transaction by transaction" details. Specifically, FERC required companies to identify traders participating in the transactions and to explain the methods used to arrive at the value or compensation of such transactions. On May 21, FERC began investigating similar transactions in electricity trading, requiring "admit or deny" responses from companies by May 31, 2002. To date, several large energy marketers, including Reliant Energy and CMS Energy, have acknowledged in public statements that they have engaged in wash-trading of electric power.

Natural Gas Rig Counts: The number of rigs exploring for natural gas increased by 29 to 725 for the week ended Friday, May 24, according to Baker-Hughes Incorporated. Natural gas rigs are nearly 30 percent below last year at this time when they numbered 1,030. However, since the week ended April 5, 2002, when natural gas rigs numbered 591, the number of rigs has increased for seven straight weeks, climbing almost 3 percent per week on average. The rig count now is almost 23 percent above the level recorded on April 5 and is at its highest level since the first week of January 2002. According to the EIA Short-Term Energy Outlook (released May 6), aggregate lease revenues from domestic oil and gas production are expected to move up this year and settle at about $300 million per month in 2003, which would be an increase of approximately 50 percent over the rates seen at the end of 2001. Inasmuch as these revenues are a strong determinant of industry cash flow, which in turn is a powerful driver of drilling activity levels, an upward trend in gas drilling levels is anticipated for this year and into 2003.

Summary:

Spot prices declined at most market locations during the week since May 22 with declines ranging between 5 and 18 cents. The futures contract for June delivery expired yesterday, settling at $3.42 per MMbtu. Net injections into storage totaled 71 Bcf, which was close to historical averages and in the range of market expectations.

Natural Gas Summary from the Short-Term Energy Outlook