Natural Gas

Overview: Thursday, September 2 (next release 2:00 p.m.on September 9)

Since Wednesday, August 25, natural gas spot prices have decreased at virtually all market locations in the Lower 48 States. For the week (Wednesday-Wednesday), prices at the Henry Hub declined 29 cents, or about 5 percent, to $5.03 per MMBtu. Yesterday (September 1), the price of the NYMEX futures contract for October delivery at the Henry Hub settled at $4.965 per MMBtu, decreasing roughly 47 cents or about 9 percent since last Wednesday (August 25). Natural gas in storage was 2,695 Bcf as of August 27, which is 7 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil increased 6 cents per barrel, or less than 1 percent, on the week to $43.89 per barrel or $7.567 per MMBtu, despite falling to $42.23 per barrel on August 31--its lowest level since July 27, 2004.

 

 

Prices:

Moderate temperatures and a favorable supply situation led to widespread declines in natural gas spot prices in the Lower 48 States since last Wednesday, August 25. Prices fell as a cold front moved into the Midwest region, mitigating cooling demand for natural gas. Meanwhile, it became increasingly clear that Hurricane Frances likely would not pose a significant threat to natural gas production in the Gulf of Mexico. Prices at most locations west of the Rockies and in the Northeast region declined less than 25 cents per MMBtu. Elsewhere in the Lower 48 States, declines ranged between 25 and 39 cents per MMBtu. With these declines, prices now stand at their lowest levels in about 9 months. Prices at the Henry Hub fell to $5.03 per MMBtu on Wednesday, September 1, which is the lowest level since December 1, 2003, when the price was $5.02 per MMBtu. Similarly, prices at the New York and Chicago citygates fell below the $5.50 and $5.00 thresholds, respectively, for the first time since November 26, 2003. However, prices overall continue to exceed last year's levels by 5 to10 percent at most market locations. As of September 1, 2004, prices at the Henry Hub were about 9 percent above last year's level.

 

 

At the NYMEX, the price of the futures contract for October delivery at the Henry Hub decreased about 47 cents per MMBtu or nearly 9 percent since last Wednesday, to $4.965 per MMBtu. This is the lowest price for a near-month contract since November 26, 2003. While the October 2004 contract is currently trading at a discount of about 7 cents per MMBtu to the Henry Hub spot price, futures contract prices for each month from November 2004 through February 2005 exceed the Henry Hub spot price by at least $0.54 to about $1.60 per MMBtu, with differences growing in each successive month through February 2005. With the futures strip through next winter trading at a significant premium to the Henry Hub spot price, economic incentives to inject gas into storage remain strong.

 

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Feb-04	Mar-04	Apr-04	May-04	Jun-04	Jul-04
Price ($ per Mcf)	5.15	4.97	5.20	5.63	5.85	5.60
Price ($ per MMBtu)	5.01	4.83	5.06	5.48	5.69	5.45
Note: 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 storage was 2,695 Bcf as of Friday, August 27, 2004, according to the EIA Weekly Natural Gas Storage Report. This is 184 Bcf, or about 7.3 percent, higher than the 5-year average for the report week. (See Storage Figure) The implied net injection during the report week was 81 Bcf, which is about 51 percent above the 5-year average net addition of 62 Bcf for the week and 14 Bcf more than the injection of 67 Bcf reported for the same week last year. Cooling degree days were about 5 percent above average in the Lower 48 States during the week ended August 28. However, cooling degree days were about 17 percent below last year's level for the same report week. (See Temperature Map) (See Deviations Map)

 

Other Market Trends:

EIA Releases Report on U.S. Natural Gas Imports and Exports: The Energy Information Administration (EIA) has published a report that examines natural gas imports and exports in 2003. It focuses on natural gas trade by pipeline to Mexico and Canada, and recent developments in U.S. participation in global LNG trade as well as longer-term trends (U.S. Natural Gas Imports and Exports: Issues and Trends 2003). Natural gas trade between the United States and other countries expanded through the 1990s driven primarily by increased imports from Canada and exports to Mexico. However, a major change in U.S. international natural gas trade occurred in 2002 as imports declined for the first time in 16 years, and the data for 2003 show this reversal has continued. Expanded liquefied natural gas (LNG) imports were insufficient to offset increased U.S. exports to Mexico and decreased imports from Canada. In 2003, the United States imported 3,996 billion cubic feet of natural gas from seven countries, a marginal decrease of 0.5 percent from the volume in 2002. The article also discusses the amount of additional LNG import capacity proposed for development during the next several years. A special appendix to this report contains a set of tables with extensive historical data on U.S. natural gas imports and exports. Information in this appendix includes volumes and prices by source country and border crossing.

 

EIA Updates "The Basics of Underground Natural Gas Storage": The Energy Information Administration (EIA) has updated its earlier report that provided an overview of storage facilities and operations as well as definitions of terms (The Basics of Underground Natural Gas Storage). In addition to explaining various methods of underground natural gas storage, such as depleted reservoirs in oil and/or gas fields, aquifers, and salt cavern formations, it also discusses the relative advantages of each type, its physical characteristics and economics. EIA collects a variety of data on underground natural gas storage and publishes selected data on a weekly, monthly, and annual basis.

 

CFTC Completed Its Investigation into Price Manipulation: The Commodity Futures Trading Commission (CFTC) issued a statement on August 30 that it had completed its seven-month investigation of possible price manipulation in the natural gas markets in the fall of 2003. The investigation, which was initiated in December 2003, found no evidence that any entity acted with an intention of manipulating prices during that time, as external factors were seen as the driving force behind the price spike. According to the information obtained during the investigation, the increase in natural gas prices was the result of distinct factors, including market reaction to colder than expected weather in the northeast United States during the first week in December 2003, and market statements and projections regarding the inventory of natural gas in underground storage caverns made in late November/early December 2003. The inquiry was conducted in full cooperation with the Federal Energy Regulatory Commission (FERC) and the New York Mercantile Exchange (NYMEX).

 

Natural Gas Rig Counts Reach a New Record: The number of gas rigs drilling reached a record high of 1,069 for the week ending August 27, according to Baker-Hughes Incorporated. The number of natural gas rigs running is almost 15 percent greater than last year at this time and about 18 percent greater than the 5-year average for the report week. The incremental change in gas rigs from last week to this week was 1.3 percent. The weekly gas rig count has shown an increase over the prior year's value each week since mid January 2003. The higher number of gas wells drilled relative to oil wells drilled continues to reflect an advantage in natural gas resources relative to domestic oil prospects.

 

Summary:

Natural gas prices declined across the board since last Wednesday, August 25, as prices in the futures markets and selected spot markets reached new 9-month lows. Working gas in storage increased to 2,695 Bcf, which is more than 7 percent above the 5-year average.

 

 

Short-Term Energy Outlook