Natural Gas

Overview: Thursday, September 21 (next release 2:00 p.m. on September 28, 2006)

Except for some Rocky Mountain markets, natural gas spot prices decreased significantly in the Lower 48 States since Wednesday, September 13, reaching the lowest levels in over 2 years at most market locations. The spot price at the Henry Hub dropped 54 cents, or about 10 percent this week (Wednesday to Wednesday, September 13 to 20) to $4.87 per MMBtu. Similarly, the price of the New York Mercantile Exchange (NYMEX) futures contract for October delivery settled at $4.931 per MMBtu yesterday (September 20), which is 52 cents, or about 10 percent, less than last Wednesday's price. As of Friday, September 15, 2006, natural gas in storage was 3,177 Bcf or 12.5 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil declined $4.09 per barrel this week to $60.00 per barrel or $10.34 per MMBtu yesterday.  

 Prices:

A variety of market influences, including falling crude oil prices, ample natural gas storage inventories, and moderate weather, placed significant downward pressure on natural gas spot prices this week. Spot market activity since Wednesday, September 13, included a sharp drop in prices last Friday following the announcement of a larger-than-average storage injection for the previous week.Although prices rebounded on Monday, decreases for the week ranged between 41 cents and 70 cents per MMBtu at all market locations outside of the Rocky Mountains. The Henry Hub spot price fell to $4.40 per MMBtu on Friday, which is the lowest price since September 3, 2004, before settling at $4.87 per MMBtu yesterday.Elsewhere in Louisiana, prices dropped 56 cents on average with an average price of $4.78 per MMBtu yesterday. The Midcontinent and locations west of the Rockies saw prices fall below $4 per MMBtu during the week reflecting potential pipeline imbalances and high inventory Operational Flow Orders (see Transportation Update below). Spot prices in these regions were $4.39 (Midcontinent), $4.70 (California), and $4.82 (Arizona/Nevada) per MMBtu yesterday. In the Rockies, completion of a scheduled pipeline hydro-test ended significant transportation constraints in this region and prices responded to the return of unrestricted natural gas flows. The spot price at Northwest South of Green River increased 98 cents per MMBtu, or 32 percent, on the week and the spot price at the Colorado Interstate Gas market location increased 84 cents, or 26 percent. The spot price at both of these locations was $4.01 per MMBtu yesterday. On average, natural gas spot prices at all market locations are about $6 per MMBtu less than at this time last year, and about 60 cents per MMBtu less than this time 2 years ago.

  At the NYMEX, the price of the futures contract for October delivery at the Henry Hub decreased 52 cents, or about 10 percent, to $4.931 per MMBtu since last Wednesday, September 13. The settlement price on Friday for the October contract was $4.892 per MMBtu, which is the lowest price for this contract since March 29, 2004, and the lowest price for any near-month contract since September 16, 2004. The contracts for the upcoming heating season (November 2006 through March 2007) fell more dramatically with decreases averaging $1.15 per MMBtu on the week. The average settlement price for these contracts was $7.64 per MMBtu yesterday. Despite these significant drops this week, this price is still $2.77 per MMBtu more than yesterday's Henry Hub spot price, which will offer continuing economic incentive to inject natural gas into storage.Beyond March 2007, the contracts for the next year decreased but at more modest increments ranging between 22 cents and 27 cents per MMBtu. The 12-month futures strip (October 2006 - September 2007) settled yesterday at $7.32 per MMBtu, which is $4.50 less than the equivalent 12-month strip (October 2005 - September 2006) at this time last year.

 Recent Natural Gas Market Data

 Storage:

Working gas in storage increased to 3,177 Bcf as of Friday, September 15, according to the EIA Weekly Natural Gas Storage Report (See Storage Figure). Storage inventories are currently 12.5 percent above the 5-year average and 12.6 percent above last year's storage level at this time.The implied net injection of 93 Bcf is 12.6 percent more than the 5-year average injection of 83 Bcf and about 22 percent more than last year's injection of 76 Bcf.With almost 6 weeks left before the heating season starts, storage inventory levels are only 150 Bcf less than the highest level they have reached since January 1993 when weekly storage data collection began. This record level occurred in November 2004 when working gas in storage was 3,327 Bcf. The larger-than-normal injection this week partly reflects moderate temperatures across the United States, which kept demand for heating and cooling needs low. For the week ending September 14, 2006, temperatures were slightly cooler-than-normal with only 15 heating degree days and 38 cooling degree days for the country as a whole according to the National Weather Service. (See Temperature Maps)

 Other Market Trends:

EIA Releases Report on Storage Capacity Estimates:The Energy Information Administration's (EIA) newly-released report, the Estimates of Maximum Underground Working Gas Storage Capacity in the United States, examines the aggregate maximum capacity for U.S. natural gas storage. There are three types of underground facilities used for natural gas storage: depleted reservoirs in oil and/or natural gas fields; aquifers; and salt cavern formations. In the Lower 48 States, about 123 entities currently operate about 400 active underground storage facilities. Although the concept of maximum working gas storage capacity seems rather straightforward, certain aspects of capacity measurement and industry operations preclude the determination of a single, definitive estimate for maximum capacity. Even though the fields generally contain peak storage volumes on October 31, some portion of capacity may not be fully utilized when the industry reaches its collective maximum. Underutilization of working gas storage capacity can be partially explained by a number of factors that are enumerated in the report. The report examines three alternative approaches to estimate the volume of natural gas that can be stored in U.S. underground storage facilities. A conservative estimate of maximum capacity is about 3,600 billion cubic feet, which is approximately equal to the sum of non-coincident peak volumes over all facilities during the years 2000-2004. The report suggests that estimates of maximum storage capacity should be considered along with the limitations of the estimation approach.

 Natural Gas Transportation Update:

Lack of significant demand and high levels of working gas in storage caused several pipelines in the West to issue warnings reacting to potential imbalances. Southern California Gas Co. declared a high-linepack operational flow order (OFO) Friday, September 15, which was in effect until Monday, September 18. The company announced that customers who deliver more than 110 percent of their scheduled gas usage would be assessed buy-back charges in accordance with their tariffs. Additionally, Pacific Gas and Electric Co. declared a systemwide Stage 2 high-inventory OFO Saturday, September 16, and added that penalties of $1 per decatherm (Dth) would be assessed to shippers exceeding 5 percent tolerance for negative daily imbalances. The systemwide OFO was in effect until Monday, September 18.El Paso Natural Gas Co. declared a systemwide strained operating condition (SOC) Sunday, September 17, which was effective until Tuesday, September 19. The pipeline set a 10 percent tolerance for positive daily imbalances owing to work being done on the Washington Ranch storage facility. El Paso suspended the maintenance on September 18 in order to allow injections into the storage facility, and stated that the SOC could be completely lifted as of September 19 since the storage injections combined with the actions taken by shippers had contributed to a stabilization of the linepack.

 Short-Term Energy Outlook