Overview:  Thursday, April 1, 2004 (next release 2:00 p.m. on April 8)

Natural gas spot prices surged upward in the past three days, bringing price levels significantly above those of a week ago (Wednesday, March 24) in all regional markets.  At the Henry Hub, the price for spot gas increased $0.28 per MMBtu on the week (Wednesday-Wednesday, March 24-31), or about 5 percent, trading yesterday at $5.63.  Taking over as the near-month futures contract on Tuesday, March 30, the NYMEX contract for May delivery moved up sharply, ending trading yesterday at its highest-ever settlement price of $5.933 per MMBtu.  EIA reported that natural gas inventories were 1,014 Bcf as of Friday, March 26, which is 7.7 percent less than the preceding 5-year average for the week.  Despite anticipation of yesterday’s OPEC decision to curtail oil production by up to 1 million barrels per day, the spot price for West Texas Intermediate crude oil declined on four of the five trading days of the week, trading yesterday at $35.75 ($6.16 per MMBtu), down $1.31 per barrel ($0.23 per MMBtu) on the week. 

 

 

Prices:

After price declines lasting more than a week, the spot market launched a run of three straight days of sharply rising prices on Monday.  Prices have risen consistently for three days at virtually every market location in the nation.  Net increases ranged from a quarter to nearly a half-dollar per MMBtu.  Increases tended to be largest in the Northeast and Midcontinent, and smallest in the Rockies.  Yesterday (Wednesday, March 31), the average price at all Northeast locations was $6.18 per MMBtu, an increase of 40 cents over last Wednesday’s average.  Average prices in the Midcontinent, West Texas, and at California locations moved above $5 per MMBtu to $5.36, $5.13, and $5.26, respectively.  Modest weather-related swing demand in some areas of the nation provided some support for cash prices. Temperatures over most of the East Coast were cooler than normal beginning over the weekend, while heat in the Southwest and West Texas generated demand for space-cooling, requiring some increase in gas-fired electricity generation.  In California, the heat coupled with some power plant outages caused the state’s Independent Systems Operator to call a Stage One power alert on Monday afternoon.  Nonetheless, few industry observers believed that increased industrial and weather loads were sufficient to account for the sharp and steady price increases.  Two other factors cited were the recent strength in the futures market and the perception that many industry participants are aggressively refilling storage inventories. 

 

 

On the NYMEX, the April contract expired on Monday, March 29, with a 3-cent loss, after spending the day trading within a less-than-6-cent range, settling at $5.365 per MMBtu.  This is just 2.6 cents less than its settlement price on its first day as the near-month contract on February 26.  Since becoming the near-month contract on Tuesday, the May contract has surged upward by $0.451, settling yesterday at $5.933 per MMBtu, its highest settlement price thus far in its 71-month life.  Its price increase on Tuesday was likely influenced by increasing futures prices for crude oil and petroleum products, but it continued to rise yesterday as these other commodities were falling.  The May contract may be deriving some support from near-term temperature forecasts.  The latest from the National Weather Service calls for below normal temperatures for nearly the entire nation east of the Rockies, and above normal temperatures west of the Rockies, through the middle of April.

 

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Sep-03	Oct-03	Nov-03	Dec-03	Jan-04	Feb-04
Price ($ per Mcf)	4.58	4.43	4.34	5.08	5.53	5.15
Price ($ per MMBtu)	4.45	4.31	4.22	4.94	5.38	5.01
Note:  The price data in this table are a pre-release of the average wellhead price that will be published in forthcoming issues of the Natural Gas Monthly.  Prices were converted from $ per Mcf to $ per MMBtu using an average heat content of 1,027 Btu per cubic foot as published in Table A4 of the Annual Energy Review 2002.
Source:  Energy Information Administration, Office of Oil and Gas.

 

Storage:

Working gas inventories were 1,014 Bcf as of Friday, March 26, according to EIA’s Weekly Natural Gas Storage Report.  This is 84 Bcf, or 7.7 percent, less than the preceding 5-year (1999-2003) average for the week (See Storage Figure).  For the second week in a row, implied net withdrawals in the East region were partially offset by implied net injections in the Producing and West regions.  The resulting total implied net withdrawal for the week of 18 Bcf is about 30 percent smaller than the 5-year average net inventory change for the week.  Significantly warmer-than-normal temperatures across roughly three-quarters of the nation (See Temperature Map) (See Deviations Map) reduced demand for space heating, allowing net injections into storage in the Producing and West regions.  Additionally, the recent significant positive spread between futures prices and the Henry Hub spot price likely provided additional incentive for storage injections.  On the other hand, the cooler-than-normal temperatures that prevailed in the Southeast, parts of New England, and the upper Midwest maintained some space-heating demand in these areas, likely influencing withdrawals in East region storage facilities.

 

 

 

Other Market Trends:

Federal Government Agencies to Study Artificial Reef Effect in Deep Water Gulf of Mexico. The Minerals Management Service (MMS), in partnership with the National Oceanic and Atmospheric Administration’s Office of Ocean Exploration (NOAA OE), awarded a contract to investigate the long-term effect of manmade structures on the deep sea, and conversely, the effect of the environment on those structures.  The contract was awarded under the auspices of the National Oceanographic Partnership Program (NOPP), with MMS providing $350,000 towards research costs and NOAA OE providing 18 days of ship time, a deep submergence remotely operated vehicle, and personnel for both.  The study is intended to examine the basic question of whether manmade artificial structures or objects such as shipwrecks or offshore petroleum platforms can function as artificial reefs in deep water.  Although there is not yet a complete understanding of how artificial reefs function on the continental shelf, particularly in the photic zone above 100 meters, it is generally accepted that artificial reefs can serve a positive function by the creation of new hard-bottom habitat in areas where hard-bottom is naturally lacking.  This can be important in the Gulf of Mexico, which has a natural bottom that is a flat plain, largely comprised of mud, clay, and sand with very little natural rock bottom and reef habitat.  Without artificial reefs, fish and marine life typically would become widely dispersed.  In the Gulf of Mexico converting offshore oil and gas structures into artificial reefs on the continental shelf has been accepted as a benefit to fisheries; 49 structures have been converted from a total of 383 structure removals between 1999 and June 2002.  However, in the deeper waters beyond the shelf, additional information is needed to evaluate the significance of a deep-sea artificial reef effect.

 

Summary: 

Spot and futures prices moved up strongly in the past few days.  The futures contract for May delivery reached a record-high settlement price on Wednesday, March 31 ($5.933 per MMBtu), while regional average spot prices exceeded $5 for all regions outside of the Rockies, especially in the Northeast, where spot prices exceeded $6.  Working gas inventories towards the end of the heating season remain more than 1,000 Bcf.

   

Natural Gas Summary from the Short-Term Energy Outlook