Natural Gas

Overview: Thursday, February 26, 2004 (next release 2:00 p.m. on March 4)

In contrast to last year's late February price spikes, spot and futures prices this week continued drifting lower as temperatures were seasonably cool across most of the country. Since Wednesday, February 18, natural gas spot prices have decreased between 10 and 30 cents per MMBtu at virtually all market locations in the Lower 48 States. For the week (Wednesday-Wednesday), prices at the Henry Hub fell 23 cents per MMBtu or 4 percent to $5.10. Yesterday (Wednesday, February 25), the NYMEX futures contract for March delivery at the Henry Hub expired at $5.15 per MMBtu, which was 21 cents less than last Wednesday's price and 59 cents less than its debut as the near-month contract at $5.74. Natural gas in storage decreased to 1,267 Bcf as of February 20, which is about 11.4 percent below the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil moved up $1.86 per barrel or about 5 percent since last Wednesday to $37.28 per barrel or $6.43 per MMBtu.

Prices:

Natural gas spot prices at the Henry Hub have generally declined since mid-February as the end of winter has drawn closer and space-heating demand has waned. In six of the past seven trading sessions, the Henry Hub price has fallen in small increments, with the one exception coming yesterday as trading resulted in a slight up-tick of 2 cents per MMBtu to $5.10. This level differs greatly from a year ago when the Henry Hub price reached more than $18 per MMBtu on February 25. Last year's relatively low levels of storage, numerous pipeline constraints, and prospects of extreme cold contrast with the relatively moderate conditions of this late February. Spot prices have generally decreased 10 to 25 cents per MMBtu at nearly all market locations east of the Rockies since last Wednesday (February 18), while prices in the West had slightly larger decreases of up to 29 cents. At the New York citygate and Algonquin citygate, which serves the New England area, prices decreased 10 and 5 cents per MMBtu to $5.71 and $5.84, respectively. As a result, the basis differential between the Northeast and Gulf-area producing region markets dropped closer to historical norms of about 60 cents. The largest decreases in prices since last Wednesday occurred in the Rockies and in California, where mild temperatures resulted in price declines of just under 30 cents per MMBtu. The price for deliveries at the Questar trading point in Utah fell 29 cents or more than 6 percent to an average of $4.35 per MMBtu.

At the NYMEX, the futures contract for March delivery expired yesterday at $5.15 per MMBtu. The March contract declined 59 cents or 10 percent in value over the course of its tenure. In comparison, the March 2003 contract gained $3.50 per MMBtu during its tenure as the near-month contract to a record-high expiry for any NYMEX futures contract of $9.13. Price movements in the futures market during the last week were similar to spot market changes, with small decreases in value during each trading session until yesterday when the contract gained a little more than 7 cents per MMBtu, slightly reducing the net decrease on the week to 21 cents. Since last Wednesday, the April contract lost 9 cents per MMBtu in value, or about 2 percent. In its final trading day prior to becoming the near-month contract, the price for the April contract was at its lowest value since early December and about 29 percent lower than the opening price of the April 2003 contract ($7.39). During the week, the value of contracts for gas deliveries further into the future fluctuated less than the March and April contracts prices. In fact, yesterday's closing price of $5.393 per MMBtu for the 12-month strip, which is the average of futures prices for the coming year, was nearly equal to the previous Wednesday (February 18) closing price of $5.397.

Storage:

Working gas in storage was 1,267 Bcf as of Friday, February 20, 2004, according to the EIA Weekly Natural Gas Storage Report (See Storage Figure). This is 163 Bcf, or 11.4 percent, below the 5-year average for the report week but 253 Bcf, or 25 percent, higher than the level last year. The implied net withdrawal during the report week was 164 Bcf, which is 69 percent more than the 5-year average withdrawal of 97 Bcf for the week, and about 6 percent more than the withdrawal of 154 Bcf reported for the same week last year. Cooler-than-normal temperatures across much of the Lower 48 States likely contributed to the larger-than-normal withdrawals of natural gas from storage. During the report week, the weather for the Mid-Atlantic region was about 5 percent colder than normal, as measured by heating degree days (HDDs) for the week ending February 21, according to the National Weather Service. (See Temperature Map) (See Deviations Map).

Other Market Trends:

EIA Reports that Profits of Major Energy Companies Fell in 2002: Profits at major U.S. energy companies in 2002 dropped nearly 50 percent from the previous year to $20.6 billion, according to the Energy Information Administration's (EIA) Performance Profiles of Major Energy Producers 2002. Net income declined for the second consecutive year, and was the lowest since 1998 for the 28 companies that reported to the EIA's Financial Reporting System (FRS) in 2002. The annual publication notes that the primary reason for the drop was a $2.2 billion net loss in income from domestic refining and marketing operations. However, net income from oil and gas operations was down by more than $4 billion, which was a 21-percent drop from the previous year. The lower income resulted mostly from more available natural gas supply in the first half of 2002, leading to lower gas prices. The report also notes that operations associated with the "other" line of business recorded a net loss of $1.5 billion owing to the decline in energy trading and marketing revenues. This line item in the FRS primarily involves activities relating to electricity and natural gas trading and marketing. With the exception of the Devon Energy acquisition of Mitchell Energy and the completion of the ConocoPhillips merger, the upstream mergers by the FRS companies that were a prominent feature of the 1998-to-2001 period were almost nonexistent. Some of the companies previously involved in significant upstream merger activity may have limited their merger activity in order to address debt level or stock value problems, according to the report, which can be accessed at Performance Profiles of Major Energy Producers 2002.

Summary:

Spot prices decreased slightly as moderate temperatures dominated most of the country. For the week, the price at the Henry Hub fell 4 percent to $5.10 per MMBtu, less than one-third of the record highs at the trading location last year at this time. Futures prices, particularly for the delivery months of March and April, fell as temperatures continue to warm with the end of winter in sight.

Natural Gas Summary from the Short-Term Energy Outlook