Natural Gas

Overview: Thursday, May 27 (next release 2:00 p.m. on June 3)

High crude oil prices and increasing cooling demand contributed to natural gas spot prices climbing 20 to 55 cents per MMBtu at most trading locations in the Lower 48 States since Wednesday, May 19. On the week (Wednesday-Wednesday, May 19-26), the Henry Hub spot price rose 52 cents per MMBtu to $6.70. The NYMEX futures contract for June delivery gained 22.5 cents per MMBtu on the week to a monthly settlement price of $6.68 in its final day of trading on Wednesday, May 26. Working gas in storage as of Friday, May 21, increased to 1,477 Bcf, which is 0.1 percent below the 5-year (1999-2003) average. The spot price for West Texas Intermediate (WTI) crude oil decreased $1.01 per barrel on the week to $40.60, or $7.00 per MMBtu.

 

 

 

Prices:

Prices moved higher in three of five trading sessions this week as new air-conditioning load, a significant loss of offshore production, and high oil prices renewed concerns over a tight natural gas market. The Henry Hub spot price on Tuesday, May 25, increased to its highest level since January 9, 2004, averaging $6.72, before slipping 2 cents to $6.70 yesterday (May 26). The Henry Hub price and other Gulf Coast prices gained approximately 8 percent on the week, likely owing at least in part to the shutdown of the Shell's Mars platform on Saturday, May 22, following the detection of a sheen of oil on the water that apparently came from a ball and socket connector that allows pipelines to the platform to move with ocean currents. The shutdown, which Shell said would result in approximately 170,000 Mcf per day of lost natural gas production, is expected to last two weeks or more. In the Northeast region, prices increased an average of 45 cents per MMBtu in tandem with higher Gulf prices, with demand in both regions higher likely owing to hotter weather and associated higher air-conditioning load. The price for spot gas off Texas Eastern Transmission in the Mid-Atlantic rose 53 cents per MMBtu on the week to $7.28, the highest price in the country. Prices in the West, including the Rockies, registered slightly lower gains of between 21 and 44 cents per MMBtu as temperatures moderated in parts of Nevada, Arizona, and California. The Southern California Border price increased 25 cents on the week to $6.10 per MMBtu.

 

 

At the NYMEX, the futures contract for June delivery expired on Wednesday, May 26, at $6.68 per MMBtu, which is the highest expiration price for a near-month contract since February 26, 2003, when the March 2003 contract expired at the record high $9.133. On Monday, May 24, the June contract increased more than 35 cents as traders responded to higher oil prices during the day and the news of the Mars platform closure. Despite small price declines in the next two trading sessions, the near-month contract gained almost 23 cents, or 3.5 percent, on the week. The June contract's expiration price is about 13 percent more than its debut settlement price of $5.924 at the beginning of its tenure as the near-month contract on April 29, and about 12 percent higher than the monthly settlement price of the June 2003 contract ($5.945). During this time of year, the NYMEX futures contract for delivery during January of the upcoming winter season is typically the highest priced contract. The January 2005 contract closed yesterday at $7.191 per MMBtu, an increase of 16.3 cents on the week and a basis of 49.1 cents to yesterday's Henry Hub spot price. This basis provides an economic incentive for industry to store natural gas for the upcoming heating season.

 

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Nov-03	Dec-03	Jan-04	Feb-04	Mar-04	Apr-04
Price ($ per Mcf)	4.34	5.08	5.53	5.15	4.97	5.20
Price ($ per MMBtu)	4.22	4.94	5.38	5.01	4.83	5.06
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 in underground storage was 1,477 Bcf as of May 21, which is 0.1 percent below the 5-year average inventory level for the report week, according to EIA's Weekly Natural Gas Storage Report (See Storage Figure). Continuing a string of relatively robust net injections, the implied net change for the week totaled 89 Bcf, which is 17 percent higher than the 5-year average injection of 76 Bcf, but 6 percent lower than last year's injection of 95 Bcf for the report week. To date, injection activity this season has reduced the deficit to the 5-year average from 5.7 percent, or 63 Bcf, on April 2, to 0.1 percent, or 2 Bcf, as of May 21. Although inventories in the East region continue to lag 4.8 percent behind the 5-year average, Producing region inventories are now 9.1 percent higher. During the report week, the weather for the country as a whole was about 50 percent warmer than normal, as measured by cooling degree days (CDDs) for the week ending May 22, according to the National Weather Service (See Temperature Map) (See Deviations Map.) Key markets for cooling demand were considerably warmer than normal. In the West South Central, including Texas, CDDs were 34 percent higher than normal. In the South Atlantic region, CDDs were 56 percent higher than normal. So far this refill season, CDDs have numbered 37 percent higher than normal and 19 percent higher than last year.

 

 

Other Market Trends:

National Weather Service Sees Potential for Active Hurricane Season: The traditional hurricane season (June 1-November 30) has a 50 percent probability of being above normal in the Atlantic Ocean this year, according to the annual pre-season outlook released last Monday (May 17) by the National Weather Service (NWS) of the National Oceanic and Atmospheric Administration. Specifically, NWS is calling for 12 to 15 tropical storms (cyclonic systems with sustained winds of 39-73 miles per hour (mph)), with 6 to 8 becoming hurricanes (winds of 74 mph or greater), and 2 to 4 of these becoming major hurricanes (storms of Category 3 through 5 on the Saffir-Simpson Hurricane Scale, with sustained winds of at least 111 mph). The"average" season in the Atlantic features 10 tropical storms, 6 hurricanes, and 2 major hurricanes, according to NWS. If NWS' predictions come true, this will be the eighth year in the past ten for above-normal hurricane activity. Further, NWS pointed out that past seasons with activity similar to that predicted for this year have produced 2 to 3 storms that have made landfall in the continental United States. As for the West coast, NWS foresees four to five tropical cyclones in the central Pacific, which is close to normal for that area.

Pipeline Operators Face Inspection Deadlines: Regulations issued earlier this year by the Office of Pipeline Safety (OPS) within the U.S. Department of Transportation, pursuant to the Pipeline Safety Improvement Act of 2002, require all natural gas pipeline operators to pass three milestones before the end of this year on their way towards implementing the gas pipeline integrity management standards specified in the Act. In accordance with the law, OPS rules require as a first step the inspection of all pipeline segments in a given pipeline's riskiest "high-consequence areas" (i.e., locations where a pipeline rupture and explosion could cause the most injuries and/or property damage) to be completed within 5 years from enactment of the law. By June 17, each operator must have begun preparing to conduct a baseline integrity assessment on at least one high-risk pipe segment already identified by the operator. Specifically, the operator must have a schedule in-hand for assessment of previously identified high-risk segment(s), and must either have begun the assessment on the first scheduled segment, or have contracted for, or be negotiating a contract for, the assessment of the identified segment(s). By August 31, operators must submit their first overall performance reports on their respective pipeline systems to OPS and by December 17 must identify all high-consequence areas along their systems and have written their respective pipeline integrity management programs. The second step required by the OPS rules requires inspection of all non-high-risk pipeline segments within the follow-on 5-year period, with all baseline assessments to be completed by 2012. The regulations also require re-inspections of all segments every 7 years.

 

DOE Says Newly Developed Drill Pipe Could Increase Oil and Gas Production: On Monday, May 17, the U.S. Department of Energy announced the successful development of a new drill pipe made from carbon-fiber resins that make it lighter, stronger, and more flexible than comparable steel pipe. The new composite-materials pipe, measuring 2 ½ inches in diameter, stands up much better to the stress and fatigue associated with horizontal drilling, a relatively new drilling technique that is usually more productive than traditional vertically-drilled wells because more pipe surface area can be brought into contact with the producing zone in a reservoir. Because the new pipe can rotate through a short-radius bend and hold this orientation for long periods without fatigue damage, its use may enhance producers' ability to reach and recover untapped oil and gas reserves. Successful field tests of the new pipe in Oklahoma resulted in enhanced production of oil at one test site and facilitated the discovery of gas at another site. While the new pipe is more expensive than steel, it can be reused for multiple wells which can significantly reduce drilling costs, according to DOE. Further, it may eventually be possible to embed electrical wire in the resin to allow for the electronic transmission of data to and from the drill bit. Finally, DOE is looking at the possibility of developing larger-diameter pipes for deep-water applications.

 

Natural Gas Rig Count: The number of rigs drilling for natural gas climbed by 14 to 1,018 for the week ending May 21, according to Baker-Hughes Incorporated. This is the highest count since gas rigs in the week ended August 31, 2001 were 1,030. This is the second consecutive week and the third week in the past four that the number of rigs drilling for gas has exceeded 1,000. Gas rigs were at a low of 673 as of November 8, 2002. Since then, gas rigs have grown steadily. During this period, the rigs drilling gas prospects increased by an average of four per week. Since the beginning of this year, the rate of change has been an increase of three drilling rigs per week. Gas rigs have comprised at least 85 percent of the drilling in the United States in almost every week since June 13, 2003. This is the longest period in which gas rigs have been such a large proportion of total rigs running.

 

Summary:

Natural gas spot prices at most market locations increased 20 to 55 cents per MMBtu owing to higher crude oil prices and the prospect of higher demand with the approaching summer season. The NYMEX price for June delivery at the Henry Hub climbed about 23 cents per MMBtu to a monthly settlement of $6.68 on Wednesday, May 26. Natural gas in storage increased to 1,477 Bcf, reducing the deficit to the 5-year average volume. The implied net increase in storage inventories on the week was 89 Bcf.

 

 

Natural Gas Summary from the Short-Term Energy Outlook