Natural Gas

Overview: Thursday, August 19 (next release 2:00 p.m.on August 26)

Higher crude oil prices this week (Wednesday-Wednesday, August 11-18) failed to offset the downward pressure on natural gas prices from unseasonably cool weather and associated lower electric power demand. Natural gas spot prices decreased 17 to 44 cents per MMBtu at most trading locations in the Lower 48 States since Wednesday, August 11. On the week, the Henry Hub spot price decreased 29 cents to $5.35 per MMBtu. The NYMEX futures contract for September delivery dropped just over 23 cents per MMBtu to a close of $5.382 on Wednesday, August 18. Working gas in storage as of Friday, August 13, increased to 2,530 Bcf, which is 5.7 percent above the 5-year (1999-2003) average. The spot price for West Texas Intermediate (WTI) crude oil increased $2.64 per barrel on the week to $47.36, or $8.17 per MMBtu.

Prices:

Prices moved lower at most market areas in three of the five trading sessions as Tropical Storm Bonnie and Hurricane Charley passed through the Gulf of Mexico and Florida with minimal effect on production operations (see below). The net price movement was an average decline of 30 cents per MMBtu at trading locations in the Lower 48 States. The Henry Hub price fell 29 cents per MMBtu, or 5.1 percent, and most production-area price movements equaled or exceeded that decline. Price declines were generally highest in the West, including at the Southern California Border, where prices moved down 43 cents per MMBtu to $5.21. With a reprieve expected from 100-degree highs in the West late in the week, trading at production points in the Rockies fell by an average of 31 cents per MMBtu to end below the $5-mark. The El Paso Bondad trading point located in Ignacio, Colorado, registered the largest decline in the region as the price fell 36 cents per MMBtu to $4.81. At major consuming markets east of the Rockies, price declines were lower, but still substantial, likely owing to reduced demand in the electric power sector. Chicago and New York citygate prices dropped close to 4 percent to $5.40 and $5.81 per MMBtu, respectively. Although the relatively high price of crude oil has appeared to be one driving force behind high natural gas prices this summer, natural gas prices continued a month-long decline this week even as crude oil prices reached record highs of more than $47 per barrel. With August temperatures unseasonably cool to date, spot prices have fallen to their lowest level since March 2004. For example, on Tuesday, August 17, the Henry Hub price was $5.26 per MMBtu, the lowest spot price registered since March 26.

At the NYMEX, the settlement price of the futures contract for September delivery fell 4.1 percent on the week to close on Wednesday at $5.382 per MMBtu. Since beginning its term as the near-month contract on July 29, the September contract has lost 79.8 cents, or 12.9 percent, of its value, returning the near-month contract price to levels not seen since March 2004. During this week’s trading, the futures contract for October delivery dropped slightly more than the near-month contract to $5.497 per MMBtu, or 25.5 cents lower than the price last Wednesday (August 11). The 12-month strip, or the average price for futures contracts over the next year, finished yesterday (August 18) at $6.147 per MMBtu, which was 12 cents lower on the week. The spread between yesterday’s Henry Hub spot price and the settlement prices for NYMEX contracts with delivery for months through January 2005 increases to a high of $1.47 per MMBtu, providing a strong incentive to place gas in storage for the upcoming heating season.

Recent Natural Gas Market Data

Storage:

Working gas in underground storage was 2,530 Bcf as of August 13, which is 5.7 percent above the 5-year average inventory level for the report week, according to EIA’s Weekly Natural Gas Storage Report (See Storage Figure). The implied net injection for the week totaled 78 Bcf, which is 33 percent higher than the 5-year average injection of 59 Bcf and a slight 1 Bcf higher than last year’s injection of 77 Bcf for the report week. During the report week, the weather for the country as a whole was temperate for this time of year, yielding 27 percent less cooling degree days (CDDs) than normal. According to the National Weather Service, CDDs numbered 51 for the week ending August 14, compared with 74 CDDs last year and the normal of 70 CDDs (See Temperature Map) (See Deviations Map). Key demand markets for electric power were considerably cooler than normal. In the West South Central, including Texas, CDDs were 28.2 percent below normal. In the South Atlantic region, CDDs were 23.7 percent below normal. So far this refill season, CDDs for the United States as a whole have numbered 1 percent greater than normal but 1 percent lower than last year.

Other Market Trends:

Gulf of Mexico Production Expected Back to Full Capacity: As of Monday, August 16, production in the Gulf of Mexico is expected to have returned to full capacity flow of 12.3 billion cubic feet (Bcf) per day. Production shut-ins began on August 10 in reaction to the approach of Tropical Storm Bonnie and Hurricane Charley. On Thursday, August 12, shut-in production reached a high of 1.1 Bcf of gas and 481 thousand barrels per day of oil, while 154 platforms and 32 rigs were evacuated. For the period Tuesday to Friday (8/10/04 – 8/13/04), cumulative shut-in gas production was 4.1 Bcf. According to the MMS New Orleans Office, there were no reports of damage to production infrastructure.

LNG Imports Increase in Second Quarter: Liquefied natural gas (LNG) imports in the second quarter of 2004 increased by about 24 percent over the same quarter last year, to the gaseous equivalent of 156.4 billion cubic feet (Bcf), according to data from the Office of Fossil Energy, U.S. Department of Energy. The Dominion-owned Cove Point LNG and Trunkline LNG terminals have the largest regasification capacity of the four operating terminals in the Lower 48 States. The Cove Point facility, located on the Maryland coast of the Chesapeake Bay, received 46.8 Bcf in the second quarter, while Trunkline LNG, near Lake Charles, Louisiana, received the second largest amount at 43.3 Bcf. Tractebel's Everett facility, located near Boston, Massachusetts, received 40.9 Bcf, and El Paso's Southern LNG terminal, located on Elba Island, Georgia, received 25.4 Bcf. The source country for the largest volume was Trinidad and Tobago, which supplied slightly more than 105 Bcf from the Point Fortin plant. Algeria was the source of approximately 29 Bcf, while Qatar supplied 5.9 Bcf.

MMS Lease Sale 192 Receives 421 Bids: The Minerals Management Service (MMS) received a high number of bids for Western Gulf of Mexico Lease Sale 192. The sale took place on Wednesday, August 18, 2004, in New Orleans, where 45 exploration and production companies turned in a total of 421 bids for 351 blocks, marking an increase from 407 bids on 335 tracts last year. However, the number of bidding companies decreased from 52 in 2003 to 45 this year. According to MMS, nine tracts received three bids each, four blocks received four bids each, 36 tracts received 2 bids each and 301 blocks received one bid per block. As was the case last year, the companies preferred deep-water blocks, and 193 bids were made for blocks located in depth of 400 meters (1,312.33 feet) or more, compared with 158 bids on shallower tracts. The highest bidder in the lease sale was BP Exploration and Production, Inc. with $28 million in 59 bids, followed by Kerr-McGee Oil and Gas Corporation with 26 bids and $14 million. Amerada Hess Corporation was the third highest bidder in the total amount of high bids.

Summary:

Spot and futures prices continued to ease as cooler-than-normal temperatures continued to dominate most of the nation east of the Rockies, offsetting higher crude oil prices. Storage injections during the week were an estimated 78 Bcf, leaving inventories in excess of the 5-year average by 5.7 percent.

Short-Term Energy Outlook