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Overview: Thursday, August 11 (next release 2:00 p.m. on August 18)
Natural gas spot prices exhibited increases in most locations this week (Wednesday – Wednesday, August 3 - 10) as demand responded to above average temperatures, high crude oil prices, and reduced coal deliveries, which added to demand for natural gas-fired power generation. The Henry Hub spot price increased 6 cents this week, or less than 1 percent, to $8.81 per MMBtu. The price of the NYMEX futures contract for September delivery increased 72 cents since last Wednesday (August 3) to settle yesterday at $9.071 per MMBtu. Natural gas in storage as of Friday, August 5, was 2,463 Bcf, which is 6.4 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil hit a record high yesterday of $64.80 per barrel ($11.17 per MMBtu) after increasing $4.04 per barrel (70 cents per MMBtu), or about 7 percent, on the week.
As high temperatures across the country continue to spur cooling demand, reduced coal deliveries are forcing some regions to replace affected coal-powered generators with gas-fired units. Although the switch likely will not have an impact on electric reliability, it reportedly has added incremental load to the demand for power generation from natural gas, thus increasing upward pressure on prices. Increases in natural gas spot prices this week were moderate compared with those in the previous report week, but still continued to increase at most trading locations in the Lower 48 States by as much as 34 cents per MMBtu. The Henry Hub spot price increased 6 cents, or less than 1 percent, over the week to $8.81 per MMBtu yesterday. On Monday (August 8), the Henry Hub spot price was $8.93 per MMBtu, the highest price at this location since February 2003. On a regional basis, California and the Rockies saw the highest increases ranging up to 34 cents per MMBtu, while the largest decreases were in West Texas, averaging 18 cents per MMBtu. Over the past two weeks, spot prices at all reporting markets have increased at least 75 cents per MMBtu, with some locations experiencing increases of up to $1.69 per MMBtu.
The price of the NYMEX futures contract for September delivery gained 72 cents since last Wednesday and settled at $9.071 per MMBtu yesterday, which is the highest price to date for this contract. The January 2006 futures contract also set a record yesterday settling at $10.251 per MMBtu, the highest price ever for a natural gas futures contract. Along with the February 2006 contract which settled at $10.236 per MMBtu and the March 2006 contract which settled at $10.026 per MMBtu, this is the first time the price for a NYMEX natural gas futures contract has surpassed $10 per MMBtu. Contracts for the next heating season (November 2005 – March 2006) gained an average of 66 cents per MMBtu this week to settle at an average of $10.003 per MMBtu. This price holds a $1.19 premium to the Henry Hub spot price and may offer an economic incentive for industry to inject gas into storage. The 12-month strip, which is an average of futures prices for the coming year, increased 56 cents per MMBtu this week to average $9.216.
Recent Natural Gas Market Data
Working gas in storage totaled 2,463 Bcf as of Friday, August 5, according to the EIA Weekly Natural Gas Storage Report. The implied net injection during the week ending August 5 was 43 Bcf, which was 33 percent lower than the 5-year average net injection of 64 Bcf. This marks the sixth consecutive week that the net injection has been lower than the 5-year average injection. Since the beginning of the injection season (April 1), the difference between the current level of inventories and the 5-year average has fallen from 227 Bcf to 149 Bcf (See Storage Figure). For the week ending August 4, the weather for the Lower 48 States was 13.5 percent warmer than normal, as measured by cooling degree days (CDDs), according to the National Weather Service (See Temperature Maps) . Owing to the warm weather, cooling demand was high at key market locations. In the East North Central, including Chicago and other major population centers, CDDs were 32 percent above normal. In the Middle Atlantic region, CDDs were about 31 percent above normal. Despite relatively low net injections, working gas in storage is still more than 6 percent higher than the 5-year average. If net injections occur at an average rate through the remainder of the injection season, working gas stocks would be close to 3,250 Bcf by the start of the heating season (November 1, 2005).
Other Market Trends:
The Energy Policy Act of 2005 Signed into Law: President Bush signed the Energy Policy Act into law on August 8, 2005, which will have broad implications for the entire energy sector, as well as the various state and Federal regulatory entities that oversee the energy industry. The Energy Policy Act contains a number of key provisions affecting the natural gas industry. The law clarifies the Federal Energy Regulatory Commission’s (FERC) jurisdiction over the siting, construction, expansion, and operation of any facility that imports or processes liquefied natural gas (LNG). A provision in the law provides $1 billion of new coastal impact assistance for fiscal years 2007 through 2010 from outer continental shelf (OCS) revenues, which will be shared annually among the 6 coastal energy-producing States: Alabama, Alaska, California, Louisiana, Mississippi, and Texas. Each State will be allocated a share based on the ratio of OCS revenues generated off the State’s coastline to total OCS revenues. Royalties from onshore Federal production are shared equally with the State where the production occurs, prior to deducting administrative costs. The bill requires the Minerals Management Service (MMS) to conduct an inventory and analysis of offshore oil and gas resources beneath the U.S. OCS, including the moratoria areas, using any available technology including seismic data, with the exception of drilling. The Act also establishes MMS with management and oversight of alternative energy uses of the OCS, including wind, wave, and solar energy. The Department of the Interior now has the authority to reduce royalty payments to maintain or stimulate oil and gas development offshore and for marginal wells. Tax depreciation of natural gas distribution lines has been reduced from 20 years to 15 years for property placed in service between April 11, 2005 and April 11, 2011.
Natural gas spot prices increased at most market locations in the Lower 48 since last Wednesday, August 3. The September futures contract settled at $9.071 per MMBtu, which is its highest level to date and 72 cents higher than last week. The January 2006 contract set an all time record for any NYMEX contract yesterday settling at $10.251 per MMBtu. Working gas in storage increased to 2,463 Bcf, which is 6.4 percent above the 5-year average.
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