Overview: Thursday, October 27 (next release 2:00 p.m. on November 3)

Natural gas spot prices increased sharply this week (Wednesday-Wednesday, October 19-26), as a large volume of production continued to be shut in from the recent major hurricanes and cool temperatures added space-heating demand in many regions of the country. For the week, the price at the Henry Hub increased $1.15 per MMBtu, or about 8.5 percent, to $14.67. At the New York Mercantile Exchange (NYMEX), the price of the futures contract for November delivery at the Henry Hub moved about 49 cents per MMBtu higher to settle yesterday (Wednesday, October 26) at $14.04. A steady pace of injections into underground storage has continued despite offshore production shut-ins of almost 5.6 billion cubic feet (Bcf) a day, indicating substantial demand loss in the wake of the hurricanes and amid the high-price environment. The volume of natural gas in storage was 3,139 Bcf as of Friday, October 21, which is 2.8 percent higher than the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil decreased $1.26 per barrel or about 2 percent since last Wednesday to trade yesterday at $60.85, or $10.49 per MMBtu.

 

 

Prices:

With yet more tropical storm activity in the Gulf of Mexico, producers evacuated offshore platforms again this week and the volume of shut-in gas increased slightly. Unlike Katrina and Rita, Hurricane Wilma did not pass through any major U.S. producing areas in the Gulf and the effects of the hurricane on offshore production were minimal. However, natural gas prices increased last week as cool temperatures moved into many regions of the country and blanketed the Northeast. Price increases on the week were widespread, with gains of $0.90 per MMBtu or more at most market locations. The Henry Hub price has risen in the past three consecutive trading sessions, including increases of more than 75 cents per MMBtu in each of the last two days, ending the week at $14.67 per MMBtu. This is the highest price for next day delivery at the Henry Hub since before Hurricane Rita. Other trading locations in producing areas along the Gulf Coast in Louisiana and East Texas registered increases ranging from $0.54 to $1.33 per MMBtu. The single exception to price increases in the region occurred in trading for delivery into Florida, where power outages dampened demand and led to a decrease of $0.52 per MMBtu in the price at Florida Gas Transmission's Zone 2. In the Northeast, daytime high temperatures were in the 40s in some areas. The result was this week's highest price increases in the country. Prices in the Northeast gained an average of $1.77 per MMBtu. The price for gas off Transcontinental Gas Pipe Line into New York City increased $1.90 per MMBtu to $16.03, a $1.36-premium to the Henry Hub price. Prices increased significantly in the Rockies and the West Coast as well, albeit slightly less so than in the East. The price at the Southern California border increased $0.39 per MMBtu, or 3.5 percent, to $11.67. Trading locations in the Rockies registered an average increase of $0.58 per MMBtu to trade at an average of $11.28 yesterday. This average price at Rockies trading locations yesterday was $3.39 per MMBtu lower than the Henry Hub price, underscoring the strain on supplies in the Gulf region. As of Wednesday, October 26, shut-ins from the recent hurricanes are still at 5.56 Bcf per day and have totaled 354 Bcf, according to the Minerals Management Service.

 

 

The prices of futures contracts also moved up this week in response to early-season cool temperatures and lingering effects from the hurricanes. The price of the NYMEX futures contract for November delivery gained $0.491 per MMBtu on the week to settle at $14.04 yesterday (October 26). Before decreasing 29.8 cents per MMBtu yesterday, the price of the near-month contract on Tuesday reached a record high settlement price for a near-month contract at $14.338. Contracts for the entire next heating season (November 2005 through March 2006) increased an average of nearly 20 cents per MMBtu to settle at $14.09. Beyond the winter months, futures contract prices are significantly.below the prices for this winter. As a result, the 12-month strip, which is an average of futures prices for the coming year, traded nearly $2.00 per MMBtu less than the average price for contracts this winter. Still, on the week, the price of the 12-month strip increased almost 13 cents per MMBtu to $12.10 since last Wednesday (October 19).

 

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Apr-05	May-05	Jun-05	Jul-05	Aug-05	Sept-05
Price ($ per Mcf)	6.44	6.02	6.15	6.69	7.68	9.76
Price ($ per MMBtu)	6.27	5.86	5.99	6.51	7.48	9.50
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 underground storage as of October 21 was 3,139 Bcf, which is 2.8 percent above the 5-year average inventory level for the week according to EIA's Weekly Natural Gas Storage Report (See Storage Figure). The net addition to storage was 77 Bcf, which is significantly higher than both the 5-year average net injection of 45 Bcf and the net injection of 31 Bcf during the report week last year. This marks the fifth time since June 3, 2005, that the weekly net injection exceeded the 5-year average net increase, as current storage levels climbed to 85 Bcf more than the 5-year average. Seasonably mild temperatures throughout the country likely generated little weather-sensitive demand, allowing for the continuing net injections. During the report week, the weather for the country as a whole was warmer than normal, as measured by degree days for the week ending October 20, according to the National Weather Service (See Temperature Maps)

 

 

 

Other Market Trends:

EIA Releases Report on Futures Contract Prices as Predictors of the Spot Price: The Energy Information Administration (EIA) released a report titled An Assessment of Prices of Natural Gas Futures Contracts As A Predictor of Realized Spot Prices at the Henry Hub, which analyzes how well futures prices predict the future spot prices. The article compares realized Henry Hub spot market prices for natural gas during the three most recent winters (November-March) with futures prices as they evolved from April through the following February, when trading for the March contract ends. Comparing monthly futures and spot market prices provides a basis to assess the performance of futures prices as a predictor of spot prices. The analysis of price data for recent years shows that futures prices are relatively poor predictors of the Henry Hub spot price that is realized during the corresponding delivery or target month, and even the final futures price for a given contract often does not anticipate correctly the realized average spot price.

Summary:

Natural gas prices this week increased as much as $2.13 per MMBtu as unseasonably cool temperatures this week covered much of the Midwest and Northeast, including major natural gas consuming centers. The Henry Hub spot prices increased $1.15 per MMBtu to $14.67. Natural gas in storage increased to 3,139 Bcf as of October 21, leaving inventories 2.8 percent above the 5-year average.

 

Short-Term Energy Outlook