Natural Gas

Overview: Thursday, January 5, 2006 (next release 2:00 p.m. on January 12, 2006)

Since Wednesday, December 21, natural gas spot prices have decreased at all market locations in the Lower 48 States, with decreases exceeding $3 per MMBtu or about 27 percent at all markets. These declines principally occurred from December 21 through December 28. On Wednesday, January 4, prices at the Henry Hub averaged $9.25 per MMBtu, reflecting a decline of $4.30 per MMBtu or about 32 percent since Wednesday, December 21, and an additional 66 cents per MMBtu since Wednesday, December 28. The futures contract for February delivery at the Henry Hub settled at $10.197 per MMBtu yesterday (January 4), falling about $4.16 per MMBtu or about 29 percent since Wednesday, December 21. Natural gas in storage was 2,641 Bcf as of December 30, which is about 7 percent above the 5-year average. Since December 21, the spot price for West Texas Intermediate (WTI) crude oil increased $4.85 per barrel, or about 8 percent to $63.41 per barrel or $10.933 per MMBtu.

Prices:

Natural gas prices in the past two weeks continued their downward trend from a relative peak on December 13. Spot prices decreased at all market locations by more than $3 per MMBtu since Wednesday, December 21, as unseasonably mild weather moved into most of the Lower 48 States. The Christmas and New Year's Day holidays likely contributed to the price declines as the shortened work weeks mitigated industrial demand for natural gas. During the week from December 21 through December 28, prices declined between $3.23 and $4.51 per MMBtu. Prices continued downward this past week (December 28 through January 4), although the declines were considerably less pronounced with decreases of no more than 81 cents at most market locations. As a result of the mild temperatures mitigating heating demand for natural gas, receipts of natural gas were significantly below nominations established during the December bidweek (November 22 - 29), contributing to high linepack conditions on many natural gas pipeline systems (See Other Market Trends). Natural gas production in the Gulf of Mexico continued to recover from the hurricane damage suffered in 2005. The Minerals Management Service (MMS) reported that shut-in natural gas production fell to 1.95 Bcf per day as of Thursday, December 29, and cumulative shut-in production since August 26, 2005, reached 561 Bcf, which is equivalent to about 11 percent of total U.S. natural gas production for the period. The lingering production shut-ins are likely contributing to the elevated price levels, as prices at most market locations remain about $2 to $4 per MMBtu, or more than 40 percent, above last year's level at this time. Prices at the Henry Hub on Wednesday, January 4, exceeded last year's level by $3.55 per MMBtu or about 62 percent. Nevertheless, since mid December, when the price at the Henry Hub hit $15.40 per MMBtu, the prevailing trend on the spot markets has been towards declining prices. During the nomination period for natural gas for January 2006 (December 23 - 28), bidweek prices increased by less than 2 percent at most market locations, with the bidweek price climbing 22 cents relative to the preceding month at the Henry Hub.

 

 

 

At the NYMEX, the price of the futures contract for February delivery at the Henry Hub settled at $10.197 per MMBtu yesterday (Wednesday, January 4), decreasing about $4.148 per MMBtu or about 29 percent since Wednesday, December 21, and $1.44 per MMBtu since Wednesday, December 28. The price for the March 2006 futures contract experienced similar declines over the same period. The 12-month futures strip (February 2006 through January 2007) traded at a premium of $0.98 per MMBtu relative to the Henry Hub spot price, averaging $10.233 per MMBtu as of Wednesday, January 4. The January 2006 futures contract closed at $11.431 per MMBtu on December 28, declining about 31 cents or 3 percent since becoming the near-month contract on November 29. The futures contract prices for the upcoming heating season months (February 2006 through March 2006) yesterday continue to trade at significant premiums relative to the Henry Hub spot price for futures prices, which will provide suppliers economic incentives to not withdraw gas from storage.

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Jul-05	Aug-05	Sept-05	Oct-05	Nov-05	Dec-05
Price ($ per Mcf)	6.69	7.68	9.76	10.97	9.54	10.02
Price ($ per MMBtu)	6.51	7.48	9.50	10.68	9.29	9.76
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 increased to 2,641 Bcf as of Friday, December 30, 2005, according to EIA's Weekly Natural Gas Storage Report (See Storage Figure). The implied net injection of 1 Bcf leaves storage levels 168 Bcf, or 6.8 percent, above the 5-year average, but 79 Bcf, or 2.9 percent, below the storage level at this time last year. This is the first time in the 12-year history of the Weekly Natural Gas Storage Report Historical Database that a net injection has occurred this late in the heating season, and the first time since December 4, 1998, that an injection occurred in December. This week's implied net change sharply contrasts with the 5-year average net withdrawal of 135 Bcf, and last year's net withdrawal of 155 Bcf. The unusual injection likely resulted from much warmer-than-normal temperatures across much of the United States during the report week, especially in major population centers in the East and Midwest which account for much of the space heating demand (See Temperature Maps). New England and the Middle Atlantic regions experienced temperatures 24 percent and 27 percent warmer-than-normal, respectively, as measured by the National Weather Service heating degree days for the week ending December 29, 2005. Temperatures in the East and West North Central regions were about 29 and 36 percent, respectively, above average. Additional factors contributing to the net injection include reduced industrial demand owing to the holiday-shortened work week, and the average differential of roughly $1.45 per MMBtu between the Henry Hub spot price and the prices for February and March futures contracts.

   

 

Other Market Trends:

Natural Gas Transportation Update:In the past week, mild temperatures prompted several natural gas pipelines to take precautionary measures to avoid imbalances on transportation systems. Both El Paso and Northwest urged shippers last week to align supplies with their markets in order to avoid potential penalties. Because recent nominations had been above takes, El Paso reported that it was injecting maximum capacity at one of its storage facilities. Pacific Gas and Electric issued a systemwide high-inventory operational flow order on Thursday, December 29, indicating low demand in some markets.Mississippi River Transmission also cited mild temperatures when it issued a warning on December 31 that it would be unable to schedule volumes that resulted in a net daily long imbalance position. The warning was lifted on Wednesday, January 4.Other transportation developments during this report week include:

• One of the Tennessee pipelines experienced a rupture on Thursday, December 29, causing surrounding residents to evacuate for a few hours.The incident caused no injuries, fires or service interruptions.
• El Paso's Line 1903 Expansion Project, placed into service on Friday, December 30, added 502 MMcf per day of capacity to its system. The project connects El Paso's northern and southern systems and allows El Paso customers to access Rocky Mountain supplies.
• A force majeure event caused Transwestern to shut down the Transcolorado interconnect meter on Wednesday, January 4 for 8 to 12 hours reducing capacity at the interconnect from 450,000 MMBtu per day to 73,000 MMBtu per day.  

EIA Reports Strong Financial Results for Major Energy Companies: Twenty-one of the nation's major energy companies reported overall net income of $26 billion on revenues of $295.1 billion during the third quarter of 2005, according to information released by the Energy Information Administration (EIA).(EIA defines major energy companies as ". . . U.S.-based publicly-owned companies or U.S.-based subsidiaries of publicly-owned foreign companies that had at least 1 percent of either production or reserves of oil or gas in the United States, or 1 percent of either refining capacity or petroleum product sales in the United States.") The 69 percent increase in net income in the third quarter of 2005 over the third quarter of 2004 primarily resulted from higher crude oil and natural gas prices, higher refining margins, higher foreign refinery throughput, and slightly higher demand in the countries comprising the Organization for Economic Cooperation and Development (OECD). The report (Financial News for Major Energy Companies), prepared from data compiled from the companies' press releases, attributes the significantly higher results primarily to a 50 percent rise in natural gas wellhead prices and a 47 percent increase in crude oil prices as measured by the refiner acquisition cost of imported crude oil for the year. Worldwide downstream natural gas and power earnings increased by 13 percent owing to a variety of factors. However, higher feedstock costs and effects of hurricanes decreased earnings from the majors' chemical operations. Earnings from the majors' chemical operations were 56 percent lower in the third quarter of 2005 than a year ago as eight of the nine companies reporting results for this line of business recorded lower earnings, citing lower margins/higher feedstock costs, higher utility costs, reduced sales volumes, and outages owing to Hurricanes Katrina and Rita as reasons for the reductions.  

Short-Term Energy Outlook