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Overview: Thursday, July 29 (next release 2:00 p.m. on August 5)
Moderate temperatures across the country except in the Southwest and Gulf Coast contributed to natural gas spot prices easing 9 to 35 cents per MMBtu since Wednesday, July 21. On the week (Wednesday-Wednesday, July 21-28), the Henry Hub spot price dropped 14 cents per MMBtu to $5.77. In contrast to the decrease in spot prices, natural gas futures prices increased this week owing at least in part to higher crude oil and petroleum product prices. The NYMEX futures contract for August delivery at the Henry Hub expired at $6.048 per MMBtu on Wednesday, July 28, after increasing 11.7 cents in its last week of trading. The September contract takes over as the near-month contract at nearly a dime premium to the August contract, closing yesterday (July 28) at $6.142 per MMBtu. Natural gas in storage as of Friday, July 23, increased to 2,297 Bcf, which is 3.1 percent above the 5-year average. Crude oil prices rose this week to recent historical highs, in part owing to concerns over supply from Russia. The spot price for West Texas Intermediate (WTI) crude oil rose $2.18 per barrel on the week to yesterday’s closing price of $42.81 per barrel, or $7.38 per MMBtu.
Natural gas spot prices in the Lower 48 States have declined for three consecutive trading days as key market areas in the East and the Midwest have experienced unseasonably cool weather. Although prices remain elevated in comparison with previous years, the slackened demand for natural gas for electric generation has contributed to prices generally softening across the board. For the week, the spot price at the Henry Hub dropped about 2.4 percent to $5.77 per MMBtu. In most other production-region trading locations along the Gulf Coast and in East Texas, prices similarly decreased in a range of 13 to 21 cents per MMBtu. However, price decreases were greatest closer to market areas with dampened electric generation demand. The spot price at Tennessee Gas Pipeline’s Zone 6, which serves major citygates in New York and other northeastern states, this week fell 19 cents per MMBtu to $6.23. In the West, specifically Rocky Mountain trading locations, prices declined up to 32 cents per MMBtu. The spot price at Opal, Wyoming, fell 31 cents per MMBtu on the week to $5.26.
At the NYMEX, the futures contract for August delivery at the Henry Hub expired yesterday (July 28) at $6.048 per MMBtu, which is 11.7 cents higher than last Wednesday’s daily settlement. During its tenure as the near-month contract, the August contract lost 7 cents per MMBtu in value, and its closing price for the month is 9.3 cents lower than the July contract’s expiration at $6.141. The August contract’s discount to the previous month’s closing price marks the first such decline since March 2004. However, contracts for futures contracts through the rest of the year currently indicate higher prices. Yesterday, the September contract settled at just over $6.14 per MMBtu, or 9.4 cents higher than the August contract. The current basis differential between the Henry Hub spot price and those of the futures contracts for delivery in each month through January 2005 increases for each successive month to a maximum of more than $1.17 per MMBtu, providing suppliers an incentive to inject gas into storage to satisfy expected peak demand next winter. The 12-month strip, or the average price for contracts over the next year, closed yesterday at just under $6.361 per MMBtu, a loss in value of 11.4 cents on the week.
Recent Natural Gas Market Data
Working gas in storage as of July 23 was 2,297 Bcf, which is 3.1 percent above the 5-year average inventory level for the comparable reporting week, according to EIA’s Weekly Natural Gas Storage Report (See Storage Figure). The implied net injection of 70 Bcf is about 14 percent lower than the implied net injection of 81 Bcf last year, reducing the year-to-year surplus to 235 Bcf. However, the implied net injection was 19 percent higher than the 5-year average of 59 Bcf for the report week, resulting in an increase in the difference from the 5-year average inventory level. Moderate temperatures throughout the Midwest and East once again provided the opportunity to re-build storage levels as cooling demand in key demand centers was minimal (See Temperature Map) (See Deviations Map). Throughout the Lower 48 States, temperatures were approximately 5 percent cooler-than-normal for the week ending July 24, as measured by cooling degree days, according to the National Weather Service.
Other Market Trends:
Natural Gas Rig Counts: The number of rigs drilling for natural gas increased to 1,047 for the week ending July 23, according to Baker-Hughes Incorporated. This is the highest gas-directed rig count since the week ended August 3, 2001. The number of natural gas rigs is about 11 percent greater than last year at this time, and about 14 percent higher than the 5-year average for the report week. The share of natural gas rigs running was more than 86 percent of the total gas and oil rig count for the report week, remaining consistently above 84 percent since mid-June of 2003. The emphasis on gas drilling reflects a relative economic advantage for natural gas compared with domestic crude oil prospects.
MMS Develops a 5-Year Royalty-in-Kind Plan: On July 12, 2004, Interior Secretary Norton announced the release of a 5-year business plan to expand its oil and natural gas royalty-in-kind (RIK) program, which is expected to increase revenue and lower administrative costs linked with the program. The RIK approach takes payment from mineral lessees “in kind” in the form of produced volumes rather than in cash payments, and then sells the energy commodity in competitive sales. The Minerals Management Service (MMS) collects revenues from purchasers and disburses them to Federal and State revenue recipients per statutory authorities. This expanded RIK program is expected to generate an extra $50 million in net revenue for the Federal government over the next 5 years. The RIK system has helped to avoid differences between producers and the MMS on the calculation of the value of the cash royalty payments as well as to increase the collection of royalty revenue.
Spot prices this week dropped between 10 and 32 cents at most trading locations owing to a lack of weather-driven demand. However, elevated crude oil prices continue to provide upward pressure on natural gas prices, which remain near $6 at most locations in the country. Storage injections for the week ending July 23 totaled 70 Bcf. Inventories for the United States as a whole are now 69 Bcf more the 5-year average.
Natural Gas Summary from the Short-Term Energy Outlook
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