Natural Gas

Overview: Thursday, January 18, 2007 (next release 2:00 p.m. on January 25, 2007)

Natural gas spot prices increased by $0.07 to $1.05 per MMBtu at nearly all trading locations in the Lower 48 States as space-heating demand remained strong amid very cold temperatures in critical gas-consuming markets. Prices at some market locations in the Northeast peaked at more than $10 per MMBtu on Tuesday and then declined significantly in Wednesday's (yesterday, January 17) trading. The average price in the Northeast remained among the highest of all regions during yesterday's trading. For the week (Wednesday-Wednesday), prices at the Henry Hub increased $0.16 per MMBtu, or 2.5 percent, to $6.57. The price of the NYMEX futures contract for February delivery at the Henry Hub fell approximately 52 cents per MMBtu to settle yesterday at $6.234. Natural gas in storage was 2,936 Bcf as of Friday, January 12, which is 20 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil decreased $1.65 per barrel or about 3 percent since last Wednesday to trade yesterday at $52.30 per barrel or $9.02 per MMBtu. The price of crude oil as of yesterday was $14.06 per barrel lower than the year-ago level, and $24.75 less than the all-time high price of $77.05 per barrel reached in early August 2006.

 Prices:

After generally declining for the first 2 days of the report week, prices at all trading locations in the Lower 48 States surged on Tuesday, January 16, when traders returned to colder weather and industrial demand came back on-line following the Martin Luther King, Jr. holiday weekend. The largest price spikes were observed in the Northeast, where the 1-day price jumps were as high as $4.09 per MMBtu. Elsewhere in the Lower 48 States, price increases on Tuesday ranged between $0.25 and $1.32 per MMBtu. The price at the Transco Zone 6 NY trading location increased $3.59 per MMBtu during the January 16 trading, its highest day-on-day increase since the $9.41 increase on January 26, 2005. However, the volume of natural gas in storage helped to alleviate the price spike. During yesterday's trading (January 17), spot prices in the Northeast decreased significantly, but the decreases were not large enough to offset completely the previous day's increases, resulting in a net average weekly increase of 42 cents per MMBtu for markets in the region. Prices at virtually all of the other trading locations in the Lower 48 States also increased since last Wednesday, with weekly increases ranging from 7 cents to $1.05 per MMBtu. The Henry Hub spot price gained 16 cents per MMBtu, or 2.5 percent, since last Wednesday,reaching $6.57 per MMBtu yesterday. The other trading locations along the Gulf of Mexico increased by an average of 31 cents per MMBtu on the week. As of yesterday, the highest regional price averages were recorded in the Arizona/Nevada trading locations ($7.46 per MMBtu), followed by the Northeast ($7.24 per MMBtu). The remaining regions in the Lower 48 States all averaged below the $7-per MMBtu mark, ranging yesterday between $6.15 and $6.98 per MMBtu.

Despite the widespread increases on the spot market, the prices of the NYMEX futures contracts for delivery through the end of the next heating season and beyond decreased. Both the February and March 2007 contracts decreased on the week about 52 cents per MMBtu to $6.234 and $6.310 per MMBtu, respectively. Similarly, prices of contracts for delivery through the 2007-2008 heating season all decreased since last Wednesday by an average of 39 cents or 5 percent per MMBtu. The 12-month strip ended trading yesterday at $7.033 per MMBtu, decreasing 42 cents or about 6 percent from its previous week's price of $7.451 per MMBtu. Futures contract prices for February 2007 through May 2007 traded yesterday at a discount to the Henry Hub spot price, with discounts ranging from 4 to 34 cents per MMBtu.With prices in backwardation this week, suppliers have economic incentives to rely more on working gas in storage. 

 Recent Natural Gas Market Data

 Storage:

Working gas in storage was 2,936 Bcf as of Friday, January 12, which is 20.1 percent above the 5-year average inventory level for the report week, according to EIA's Weekly Natural Gas Storage Report (See Storage Figure). Although the implied net withdrawal of 89 Bcf is the second largest weekly net withdrawal since the beginning of the 2006-2007 hearing season, it is 25 percent lower than the 5-year average net withdrawal of 119 Bcf, but significantly higher than the last year's net withdrawal of 42 Bcf for the report week. Currently, volumes of natural gas in storage are 354 Bcf or nearly 14 percent higher than last year at this time. Continued moderate temperatures throughout the country likely mitigated space-heating demand, making it less necessary to withdraw from storage inventories (See Temperature Maps). The reduced demand along with prices in contango last week, which reduces economic incentives to withdraw natural gas, both would have contributed to the below-average storage withdrawals. Temperatures, as measured by heating degree-days (HDDs), were between 5 and 40 percent above normal for all Census Divisions for the week ending January 11, according to the National Weather Service. In particular, warmer-than-normal temperatures continued in key consuming markets, such as the Middle Atlantic and East North Central where HDDs were 37 and 30 percent above normal, respectively.

 Other Market Trends:

EIA Evaluates Greenhouse Gas Reduction Proposal:On Thursday, January 11, the Energy Information Administration (EIA) released a report prepared in response to a request by several U.S. Senators for an analysis of a proposal that would regulate emissions of greenhouse gases through a national allowance cap-and-trade system. The report, titled "Energy Market and Economic Impacts of Reducing Greenhouse Gas Intensity with a Cap and Trade System," found that the proposed phased auction program would reduce total greenhouse gas emissions by 562 million metric tons of carbon dioxide equivalent (MMTCO2e), or about 6 percent by 2020, and by 1,259 MMTCO2e, or about 13 percent, by 2030, as compared with the reference case in EIA's Annual Energy Outlook 2006 (AEO2006). As energy-related carbon dioxide (CO2) accounts for 82 percent of greenhouse gas emissions in the AEO2006 reference case, the program would have several impacts in the energy sector. According to EIA, the cost of greenhouse gas allowances used for the cap-and-trade system would be passed through to consumers, raising the price of fossil fuels and providing an incentive to lower energy use and shift away from fossil fuels, particularly in the electric power sector. In order to reduce CO2 emissions, the electric power sector is expected to shift away from its historical reliance on coal generation. This drop in coal generation would mainly be replaced by an increase in nuclear and non-hydro renewable generation and to a lesser extent by natural gas.Relative to the AEO2006 reference case, natural gas generation under the new program in 2030 would be 20 percent higher as new combined-cycle plants become more attractive relative to coal plants. However, increased capital expenditures for new technologies and higher fossil-fuel prices would result in higher electricity prices. In response to higher prices, EIA projects that consumers in all sectors would reduce energy consumption and shift away from fossil fuels where possible. Total consumption for natural gas changes less than 1 percent by 2030 relative to the AEO2006 reference case, and the change mainly occurs in the electric power sector. By 2020, electric power sector natural gas consumption is projected to be about 2 percent less than the AEO2006 reference case, but by 2030 electric power natural gas consumption is expected to be 8 percent higher than in the AEO2006 reference case.

 Natural Gas Transportation Update:

• Transcontinental Gas Pipe Line Corporation (Transco) announced on Friday, January 12, that imbalance makeup nominations would not be allowed because of above-normal temperatures along the entire system.It also encouraged shippers with negative imbalances to resolve them as soon as possible and imposed a ban on excess storage injections.Transco lifted all restrictions on Wednesday when market-area temperatures returned to normal levels.
• Because of cold weather in its service area, Mississippi River Transmission Corporation declared a System Protection Warning beginning on Saturday, January 13, subject to several conditions.Shippers were encouraged to take precautions to avoid an Operational Flow Order (OFO).
• Southwest Gas Corporation took measures to avoid an OFO by issuing a notice on Friday, January 12.In anticipation of cold weather in the Las Vegas service area, the notice advised customers to limit actual takes and not exceed scheduled supplies.
• El Paso Natural Gas Company declared a systemwide Strained Operating Condition on Tuesday, January 16, with an imbalance tolerance of 10 percent.The pipeline attributed the restriction to system linepack, which was declining at an unsustainable rate, and warned of the possibility of a Critical Operating Condition if the situation does not improve.
• Repairs were completed on Friday at Questar Pipeline Company's Greasewood Compressor Station in Rio Blanco County, Colorado, allowing 45,000 decatherms per day of capacity at a TransColorado Pipeline interconnect.
• The Cameron Meadows natural gas processing plant in southern Louisiana has been restored to full design capacity of 500 million cubic feet (MMcf) per day as of Friday, January 12.The plant was significantly damaged during Hurricane Rita in 2005, and has been operating at 300 MMcf per day since February 2006.

 Short-Term Energy Outlook