Natural Gas

Overview:

Spot prices overall showed strong gains since Tuesday, December 31. Futures prices were mixed, with the February and March contracts retreating slightly from their levels of Thursday, January 2 (the first day of trading in the New Year), while out-month contracts had slight gains. Temperatures were relatively warm throughout most of the nation for a third consecutive week, while at the same time a weekend snow storm in the Middle Atlantic and Northeast helped push spot prices higher at the end of last week. At the Henry Hub, the average spot price rose 47 cents for the week (prices for Wednesday, January 1, deliveries were established in trading on December 31), to end trading yesterday (Wednesday, January 8) at $5.07 per MMBtu. The NYMEX futures contract for February delivery declined 9 cents per MMBtu, settling yesterday at $5.161. Natural gas in storage as of Friday, January 3 decreased to 2,331 Bcf, which is just 2 Bcf below the 5-year (1998-2002) average. The spot price for West Texas Intermediate (WTI) crude oil, which had reached $33.26 per barrel on Friday, fell to $30.66 per barrel, or $5.29 per MMBtu yesterday.

 

 

Prices:

Spot prices moved up on Thursday and Friday (January 2-3), then declined Monday and Tuesday, as weather forecasts vs. actual daily temperatures sent conflicting signals to markets. Prices on Wednesday reversed direction yet again, as the massing of Arctic air in Northeastern Canada was noted. Prices increased at virtually all market locations on Wednesday, with increases ranging from 11 to 49 cents per MMBtu. At the Henry Hub, the average spot price climbed 18 cents to $5.07 per MMBtu. The largest gains occurred in the Northeast. Continuing transportation restrictions on both Tennessee and Algonquin contributed partially to the rising prices. The New York citygate price rose 15 cents, to $6.26 per MMBtu. Wednesday's strong gains left spot prices significantly higher for the week. Even Rockies locations saw increases of several pennies despite the continuing warm temperatures in the region. The highest weekly increases also occurred in the Northeast, where prices rose an average of 77 cents per MMBtu to an average of $5.98 per MMBtu as of the end of trading on Wednesday.

 

Futures settlement prices also exhibited swings, as the near-month contract (February delivery) increased by 46 cents per MMBtu and fell by 40 cents during the past 5 trading days. Both changes appear related to contrasting weather forecasts. However, the February contract had consecutive gains on Tuesday and Wednesday, leaving it at $5.161 per MMBtu at settlement yesterday (Wednesday, January 8). The contract for March delivery mirrored the near-month contract's path over the past week, settling yesterday at $5.111 per MMBtu, for a net change of 2 cents since last Thursday's (January 2) settlement price.

 

Spot Prices ($ per MMBtu)	Thur.	Fri.	Mon.	Tues.	Wed.
	2-Jan	3-Jan	6-Jan	7-Jan	8-Jan
Henry Hub	4.94	5.13	4.95	4.89	5.07
New York	6.10	6.26	6.38	6.11	6.26
Chicago	4.81	5.01	4.81	4.75	4.99
Cal. Comp. Avg,*	4.37	4.55	4.40	4.41	4.67
Futures ($/MMBtu)
Feb delivery	5.251	5.344	4.935	5.127	5.161
Mar delivery	5.131	5.220	4.870	5.047	5.111
*Avg. of NGI's reported avg. prices for: Malin, PG&E citygate,
and Southern California Border Avg.
Source: NGI's Daily Gas Price Index (http://intelligencepress.com).

 

Storage:

Working gas in storage was 2,331 Bcf for the week ended January 3, according to EIA's Weekly Natural Gas Storage Report (See Storage Figure), which is virtually identical to the 5-year average (2,333 Bcf). Implied net withdrawals were 86 Bcf, marking the second time in 3 weeks that withdrawals have fallen below 100 Bcf. The unseasonably warm weather throughout the nation during that week was a likely factor that kept net withdrawals at only 57 percent of the 150 Bcf average for the past 5 years (1998-2002). (See Temperature Map) (See Deviation Map.) According to the latest data from the National Weather Service, gas customer-weighted heating degree-days (HDD) fell below normal for the week by double-digit percentages in all nine of the Census Divisions in the Lower 48 States, ranging from 16 percent below normal in the Middle Atlantic and New England to 30 percent below normal in the Pacific and the West South Central (TX, LA, OK, and AR). For the United States as a whole, HDDs were 24 percent less than normal.

 

All Volumes in Bcf	Current Stocks 1/3/032	Estimated Prior 5-Year (1997-2001) Average	Percent Difference from 5 Year Average	Implied Net Change from Last Week	One-Week Prior Stocks 12/27/02
East Region	1,333	1,416	-5.9%	-67	1,400
West Region	342	293	16.7%	-11	353
Producing Region	656	624	5.1%	-8	664
Total Lower 48	2,331	2,333	-0.1%	-86	2,417
Source: Energy Information Administration: Form EIA-912, "Weekly Underground Natural Gas Storage Report," and the Historical Weekly Storage Estimates Database. Row and column sums may not equal totals due to independent rounding.

 

Other Market Trends:

S&P Notes Slowdown in Pipeline Projects: After a boom in natural gas pipeline construction, the number of new pipeline projects appears to be slowing, according to Standard & Poors (S&P). S&P noted in a report that recent pipeline additions mostly have been driven by electric power plant construction, which will likely slow in the coming years owing in part to an oversupply of electricity in many regions of the country. In the Northeast, there will likely be an expansion of the Maritimes and Northeast Pipeline, which transports gas into the region from Sable Island production in Eastern Canada. Activity on projects bringing natural gas from traditional routes from the South has slowed to a "virtual standstill" after a tremendous amount of activity in the last couple of years. In the Southeast, a region targeted with several proposals for pipeline expansions to meet demand from new power plants, S&P allows for the construction of at least one new major pipeline to transport re-gasified natural gas from Bahamas-based liquefied natural gas (LNG) terminals into Florida. According to S&P, it seems probable that one or more of the proposed pipelines — AES Corp.'s Ocean Express, Tractebel North America Inc.'s Calypso, and El Paso Global LNG's Seafarer — will be built. Lastly, S&P reported that expansions out of the Rockies and into California are on the drawing board, the largest of which are the 1 Bcf per day expansion of the Kern River pipeline and El Paso Corp's 750 MMcf per day expansion.

 

Natural Gas Rig Count: The number of rigs drilling for natural gas dropped 16 to 706 for the week ending January 3, according to Baker-Hughes Incorporated. This is the first week that the number of rigs drilling for gas has declined since the week ending November 8, when rigs numbered 673. The current number of rigs is 6 percent below the level last year at this time. The total number of rigs in the United States, including natural gas and oil drilling, declined 25 to 837 this week. Natural gas drilling continues to account for an increasingly larger portion of drilling activity with its share growing to 84.3 percent from 83.8 percent last week. This is the highest percentage of rigs dedicated to natural gas over oil production since the middle of September, when natural gas rigs accounted for 86.4 percent of rig activity.

 

Natural Gas Summary from the Short-Term Energy Outlook:

EIA projects that natural gas wellhead prices will average $4.20 per MMBtu through January 2003 and then increase to $4.61 in February and $4.23 in March (Short-Term Energy Outlook, released January 8, 2003). Wellhead prices for the overall heating season (November through March), assuming normal weather, are expected to average about $4.10 per MMBtu, or $1.74 more than last winter's levels, while prices to residential customers are expected to average $8.51 per MMBtu compared with $7.14 last winter. Natural gas prices were higher than expected in November and December as below-normal temperatures throughout much of the nation increased heating demand, placing upward pressure on gas prices. Spot prices at the Henry Hub climbed above $5.00 per MMBtu in the second week of December and stayed near or above this threshold through the end of the month. Overall in 2002, wellhead prices are expected to average $2.90 per MMBtu compared with $4.00 in 2001. In 2003, average wellhead prices are projected to increase about $1.00 per MMBtu over the 2002 level to $3.90 per MMBtu, owing to expectations of higher demand levels than in 2002 and lower storage levels for most of the year compared with 2002 levels.

 

Total natural gas demand in 2002 declined by an estimated 1.7 percent from the 2001 level, mainly because of overall weakness in the industrial sector, particularly in the first three quarters of the year. However, solid growth in natural gas demand of 4.7 percent seems likely in 2003, especially if industrial sector consumption expands significantly as expected. In 2004, natural gas demand is projected to rise by an additional 2.7 percent as industrial demand continues its recovery from its 2002 lows.

Based on preliminary data through September 2002, domestic dry natural gas production appears to have been mostly flat in 2002 compared with an estimated growth rate of 2.4 percent in 2001. Lower demand and lower natural gas prices in 2002 reduced production and resource development incentives relative to 2001. As of January 3, 2003, working gas stocks were 2,331 Bcf, which is only 2 Bcf (0.1 percent) less than the 5-year average, despite the abnormally cold weather in November and December. Furthermore, natural gas-directed drilling while down sharply from 2001 levels, is still quite strong from a longer historical perspective. Also, the gas-directed rig rate rose in December. Baker-Hughes reported that the number of rigs drilling for natural gas averaged 714 in December compared with 683 in November. In 2003, production is expected to be 19.45 trillion cubic feet, which would be a solid increase from production levels in 2002. Also, net imports of natural gas are expected to increase in both 2003 and 2004, which should relieve some of the potential upward price pressure on the domestic market

 

Short-Term Natural Gas Market Outlook, January 2003
	History			Projections
	Oct-02	Nov-02	Dec-02	Jan-03	Feb-03	Mar-03
PRICES ($/MMBtu)
Average Wellhead Price	3.26	3.50	3.94	4.20	4.61	4.23
Residential Price	8.23	8.52	8.31	8.45	8.55	8.71
Electric Utilities Price	3.62	4.15	4.53	4.98	5.40	4.93
SUPPLY (Trillion Cubic Feet)
Total Dry Gas Production	1.60	1.59	1.66	1.68	1.51	1.67
Net Imports	0.28	0.29	0.31	0.34	0.30	0.31
Imports	0.34	0.33	0.35	0.37	0.33	0.35
Exports	0.05	0.04	0.04	0.03	0.03	0.04
Suppl. Gaseous Fuels	0.01	0.01	0.01	0.01	0.01	0.01
Total New Supply	1.892	1.890	1.979	2.024	1.811	1.986
Working Gas in Storage
Opening	3.057	3.149	2.933	2.324	1.679	1.296
Closing	3.149	2.933	2.324	1.679	1.296	1.106
Net Storage Withdrawal	-0.092	0.216	0.609	0.645	0.383	0.190
Total Supply	1.800	2.106	2.588	2.669	2.193	2.176
Balancing Item	-0.151	-0.151	-0.212	0.019	0.187	0.080
Total Primary Supply	1.649	1.955	2.376	2.688	2.380	2.256
DEMAND (Trillion Cubic Feet)
Lease & Plant Fuel	0.097	0.097	0.102	0.102	0.092	0.101
Pipeline Use	0.049	0.063	0.081	0.089	0.076	0.071
Delivered to Consumers	1.503	1.794	2.194	2.495	2.211	2.083
Residential	0.249	0.473	0.704	0.915	0.803	0.662
Commercial	0.194	0.273	0.359	0.437	0.404	0.356
Industrial	0.869	0.881	0.949	0.996	0.885	0.929
Elec Utility	0.191	0.168	0.182	0.147	0.119	0.136
Total Demand	1.649	1.955	2.376	2.687	2.379	2.255

 

Source: Energy Information Administration, Short-Term Energy Outlook, January 2003.