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

Since Wednesday, September 27, natural gas spot prices increased at most market locations in the Lower 48 States.  On Wednesday, October 4, prices at the Henry Hub averaged $4.37 per MMBtu, a gain of 2 cents per MMBtu, or less than 1 percent, since the previous Wednesday.  The NYMEX futures contract for November delivery at the Henry Hub settled at $5.995 per MMBtu, on Wednesday, October 4, climbing about 55 cents per MMBtu, or 6 percent, from the settlement price of $5.669 recorded last Wednesday.  Natural gas in storage was 3,327 Bcf as of September 29, which is about 12 percent above the 5-year average.  The spot price for West Texas Intermediate (WTI) crude oil decreased $3.43 per barrel, or about 5 percent, on the week (Wednesday-Wednesday) to $59.53 per barrel or $10.26 per MMBtu.

 

 

Prices:

Spot prices increased since last Wednesday, September 27, with increases of up to 15 cents per MMBtu at most market locations, although some markets posted price hikes of up to 57 cents per MMBtu.  Through trading on Friday, September 29, spot prices declined at most market locations with prices at the Henry Hub falling to $3.66 per MMBtu—the lowest level since September 26, 2002, when the spot price was $3.59 per MMBtu.  However, spot prices recovered from the intraweek lows posted on September 29, despite the moderate temperatures that prevailed throughout most of the Lower 48 States.  Several market factors likely contributed to the price increases.  Some natural gas producers, including Questar Exploration and Production Company, voluntarily shut in production, reducing the available supply of natural gas on the market.  Meanwhile, some coal and nuclear power plants were down for maintenance, which likely contributed to increased demand for natural gas for electric generation.  Finally, the increasing basis differences between natural gas spot and futures prices likely contributed to continued high injection demand for natural gas as the refill season is in its final month.  The largest price increases since last Wednesday principally occurred in the Rocky Mountain region, where prices climbed about 33 cents per MMBtu on average, as some markets in the region posted increases of up to 57 cents per MMBtu on Wednesday, October 4.  The West Texas, Arizona/Nevada, and Midcontinent regions also had significant gains, with prices climbing more than 23 cents per MMBtu on average in each region.  Elsewhere, price increases were less pronounced with gains of less than 12 cents per MMBtu on average.   Prices at most market locations remain more than $7 per MMBtu or 62 percent below last year’s level.  This year’s lower price level reflects an improved natural gas supply situation relative to last year owing greatly to the absence of hurricane activity in the Gulf of Mexico and the level of working gas in storage, which remains significantly above the 5-year average and last year’s level at this time. 

 

 

At the NYMEX, prices for the futures contracts for the next 12 months increased across the board with the 12-month futures strip (November 2006 through October 2007) climbing about 38 cents per MMBtu, or about 5 percent, since last Wednesday, September 27. Price increases on the futures markets may have been driven by a short-covering rally as the relatively low futures prices enticed traders to purchase futures contracts, offsetting prior positions in the natural gas futures market that would leave them vulnerable to future increases in natural gas prices.  The largest increases on the 12-month futures strip occurred for the futures contracts for delivery during the heating season months (November 2006 through March 2007) as prices increased by about 6 percent on average since last Wednesday, September 27.  Averaging $7.56 per MMBtu, the futures contract prices for delivery during the upcoming heating season traded at an average premium of about $3.19 per MMBtu to the Henry Hub spot price.  Overall, the 12-month futures strip (October 2006 through September 2007) traded at a premium of $3.23 per MMBtu relative to the Henry Hub spot price, averaging $7.60 per MMBtu as of Wednesday, October 4.  Differentials of this magnitude between the spot price and the futures contract prices provide suppliers strong economic incentives to inject gas into storage. 

 

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Apr-06	May-06	June-06	July-06	Aug-06	Sep-06
Price ($ per Mcf)	6.59	6.19	5.80	5.82	6.51	5.51
Price ($ per MMBtu)	6.42	6.03	5.65	5.67	6.34	5.37
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 totaled 3,327 Bcf as of Friday, September 29, which is about 12 percent above the 5-year average inventory level for the report week, according to EIA’s Weekly Natural Gas Storage Report (See Storage Figure). This matches the highest level that weekly working natural gas stocks have reached in the 12-year history of the EIA Weekly Natural Gas Storage Report Historical Database, reported for the week ending November 5, 2004.  For the week, the implied net injection of 73 Bcf was 10 percent more than the 5-year average of 66 Bcf and 61 percent above last year’s injection of 45 Bcf. As of September 29, stocks exceeded last year’s level by 404 Bcf and the 5-year average by 360 Bcf. During the report week, temperatures in the Lower 48 States roughly approximated normal levels.  On average, cooling degree days (CDD) were about 8 percent above normal levels in the Lower 48 States, while heating degree days equaled normal levels in the Lower 48 States. (See Temperature Maps)

 

 

Other Market Trends:

EIA Report Finds Relationship Between Oil and Natural Gas Prices.  The Energy Information Administration (EIA) released a report, The Relationship Between Crude Oil and Natural Gas Prices, that analyzes the salient economic factors that link crude oil and natural gas prices and assesses the statistical significance of the relationship between the two over time. Typically, this relationship has been approached using simple correlations and deterministic trends. When data have unit roots as in this case, such analysis is faulty and subject to spurious results. The paper examines the time series econometric relationship between the Henry Hub natural gas price and the West Texas Intermediate (WTI) crude oil price and finds an error-correction relationship relating Henry Hub prices to the WTI and a trend capturing the relative demand and supply effects over the 1989-through-2005 period. The focus of the econometric analysis is primarily on the movements in the prices; the economic factors are not explicitly modeled. Nevertheless, a significant stable relationship between the two price series is identified. Oil prices are found to influence the long-run development of natural gas prices, but are not influenced by them.

 

EIA Releases Analysis Report on the Withdrawals from Working Gas Storage During July and August 2006.  The Energy Information Administration (EIA) report Withdrawals from Working Natural Gas Stocks During Summer 2006 examines the net withdrawals of 7 and 12 billion cubic feet (Bcf) during the weeks ending July 21, 2006, and August 4, 2006, reported in the Weekly Natural Gas Storage Report. These summer-time withdrawals are notable because they marked the first two times that working gas stocks experienced a weekly net decline during the months of May through September in the 12-year history of the weekly storage data. The report finds that a combination of electricity and fuel market developments accounts for the atypical working natural gas inventory behavior, including above-normal levels of working gas stocks, increased gas-fired electric generation, extremely hot temperatures in the Lower-48 States, and backwardation in the price of the near-month natural gas futures contract.

 

Natural Gas Transportation Update:

• Pacific Gas & Electric Company (PG&E) expanded an existing operational flow order (OFO) into a system-wide stage-3 high-inventory OFO on Thursday, September 28, 2006. The company will assess penalties of $5 per decatherm (Dth) for customers who exceed the 5 percent tolerance for negative daily imbalances. PG&E is expected to end the OFO Thursday, October 5, increasing the tolerance for negative daily imbalances to 10 percent for today’s gas day.
• Natural Gas Pipeline Company of America (NGPL) declared several restrictions on its system owing to the expected line pack conditions and the Columbus Junction storage facility maintenance. Among the restrictions, NGPL will have limited flexibility in providing linepack services on the Amarillo system, resulting in a reduction of injections into the Amarillo storage facility under all storage service agreements. These restrictions were declared on Tuesday, October 3, and are expected to last until Friday, October 6, 2006.
• On Wednesday, October 4, Florida Gas Transmission Company reported damage to its Texas mainline near compressor station 6, which will require 1 to 3 days of repair work. The damaged line had been transporting about 300,000 Dth per day.

 

 

 Short-Term Energy Outlook