Natural Gas

Overview: Thursday, September 8 (next release 2:00 p.m. on September 15)

Natural gas spot prices decreased sharply since Wednesday, August 31, as milder temperatures moved in through the Lower 48 States and some shut-in Gulf production returned to market in the wake of Hurricane Katrina. For the week (Wednesday to Wednesday), the price at the Henry Hub decreased $1.65 per MMBtu, or about 13 percent, to $11.05 per MMBtu. The NYMEX futures contract for October delivery at the Henry Hub declined about 27 cents since last Wednesday to close yesterday at $11.201 per MMBtu. Natural gas in storage as of Friday, September 2, was 2,669 Bcf, which is 3.7 percent above the 5 year average. The spot price for West Texas Intermediate (WTI) crude oil decreased $4.25 per barrel, or about 6 percent, since last Wednesday to trade yesterday at $64.38 per barrel or $11.10 per MMBtu.

 

Prices:

Following dramatic increases in response to Hurricane Katrina early last week, spot prices have declined at all market locations since last Wednesday, August 31, by as much as $5.05 per MMBtu. Shut-in natural gas production is slowly returning to the Gulf of Mexico after Hurricane Katrina devastated portions of the Gulf coast last week. The Minerals Management Service (MMS) reported that as of Wednesday, September 7, shut-in natural gas production is 4.0 Bcf per day, which is equivalent to 40 percent of the daily gas production in the Federal offshore Gulf of Mexico. Last week, immediately following Hurricane Katrina, reported shut-in gas production reached as high as 8.798 Bcf per day. Cumulative shut-in gas production since August 26 is 71.664 Bcf as of yesterday (September 7). Although most locations are still trading at elevated prices, milder temperatures throughout the Lower 48 States, declining crude oil prices, and the returning supplies in the Gulf of Mexico have decreased the upward pressure on natural gas prices. At the Henry Hub, the spot price decreased $1.65 per MMBtu, or about 13 percent, over the report week to $11.05 per MMBtu yesterday. Other trading locations in Louisiana experienced decreases ranging from $1.09 per MMBtu to $5.05 per MMBtu. Prices in the Northeast, which ranged between $10.64 and $11.61 per MMBtu yesterday, decreased an average of $2.38 per MMBtu for the week. In the Rockies and California, prices ranged between $8.02 and $9.27 per MMBtu yesterday following an average decrease of 93 cents since last Wednesday.

 

 

The price of the NYMEX futures contract for October delivery at the Henry Hub dropped 27 cents, or about 2.4 percent, this report week (Wednesday to Wednesday) to $11.201 per MMBtu. After sharp increases following Hurricane Katrina, price changes for all other contracts this week were mixed but were generally around 1 percent. Futures contracts for the upcoming heating season (November to March) are all trading above $11 per MMBtu with the lowest settling yesterday at $11.646 per MMBtu (November 2005) and the highest at $12.286 per MMBtu (January 2006), which is the highest price for any futures contract listed on the NYMEX. Compared with the Henry Hub price of $11.05 per MMBtu, the futures contracts for this heating season offer a premium up to $1.236. The 12-month strip, which is an average of futures prices for the coming year, decreased about 3 cents per MMBtu this week to average $10.573 per MMBtu.

 

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Mar-05	Apr-05	May-05	Jun-05	Jul-05	Aug-05
Price ($ per Mcf)	5.98	6.44	6.02	6.15	6.69	7.68
Price ($ per MMBtu)	5.82	6.27	5.86	5.99	6.51	7.48
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 as of September 2 totaled 2,669 Bcf, which is 3.7 percent above the 5-year average inventory level for the week, according to EIA's Weekly Natural Gas Storage Report (See Storage Figure). During a week of production shut-ins owing to Hurricane Katrina, net additions to storage were significantly below normal. The implied net injection to storage was 36 Bcf, which was slightly less than half of the 5-year average net injection of 71 Bcf for the week and about 55 percent lower than the net injection of 80 Bcf during the report week last year. This report week is the tenth consecutive week that the implied net injection was lower than the 5-year average, which has reduced the difference between current storage levels and the 5-year average to 95 Bcf from 227 Bcf at the beginning of the injection season (April 1). According to the Minerals Management Service, shut-ins as of September 2 totaled 49 Bcf. With the exception of some significant heat in parts of California and Southwest, temperatures across the nation during the week covered by this storage report were moderate relative to the prior week, likely reducing demand for natural gas as a fuel for power generation to meet air-conditioning load (See Temperature Maps). Additionally, while temperatures were higher than normal in the West South Central and East South Central regions, power outages from Katrina likely hampered demand.

 

Other Market Trends:

Natural Gas Rig Count: The number of rigs drilling for natural gas was 1,219 as of September 2, 2005. The current number of rigs drilling for natural gas exceeds the number of rigs drilling for the first week in September 2004 by about 13 percent. As a percentage of total rigs, the natural gas rigs drilling increased to more than 89 percent during June, which is a record share. After remaining at that level for several weeks, the gas share declined to slightly more than 84 percent this week, falling to this level for the first time since May 2003. The current gas rig level is 16 below the record high of 1,235 reached on August 5, 2005. The most recent rig counts reflect a number of offshore rigs that were lost or damaged owing to Hurricane Katrina, and further reductions in offshore rigs are expected.

 

Natural Gas and Oil Production in the Offshore Gulf of Mexico:  According to reports of the Minerals Management Service (MMS) of the Department of the Interior on the impacts of Hurricane Katrina, the majority of offshore natural gas and oil production facilities could be back on line in days or weeks, instead of months.  Natural gas and oil production in the Gulf of Mexico (GOM) accounts for 21 percent of domestic natural gas and 29 percent of domestic crude oil production.  The effects from Hurricane Katrina in the region caused as much as 88 percent of the natural gas and 95 percent of the oil production to be shut in early last week.  In the GOM, 37 shallow water platforms of the 4,000 production facilities in the outer continental shelf (OCS) were destroyed, which accounted for only 1 percent of the total Gulf production, whereas the large deep water platforms that account for 10 percent of the Federal offshore oil production have suffered extensive damage and may take up to 3-6 months to be back on line.  Some pipelines are operational again, while a number of them may take a couple months to repair.  As of September 7, about 4.0 Bcf/d or 40 percent of the natural gas and about 860,000 barrels or 57 percent of the oil production still remains shut in.

 

Summary:

Natural gas spot prices exhibited decreases ranging from 65 cents to $5.05 per MMBtu at all market locations since last Wednesday, August 31, as shut-in natural gas production returns to the Gulf of Mexico following Hurricane Katrina. The October futures contract settled at $11.201 per MMBtu yesterday, which is 27 cents or 2.4 percent lower than last week. Working gas in storage increased to 2,669 Bcf with an implied net injection of 36 Bcf.

 

Short-Term Energy Outlook