Natural Gas

Overview: Thursday, September 13, 2007 (next release 2:00 p.m. on September 20, 2007)

Natural gas spot and futures prices generally increased this report week (Wednesday to Wednesday, September 6-13), as tropical storms threatened to disrupt supplies and pipeline explosions in Mexico stirred concerns of supply security. Hurricane Humberto is still active near the Texas-Louisiana border at the time of this writing, and Tropical Depression 8 in the South Atlantic is apparently moving toward Puerto Rico and the general direction of the Gulf of Mexico (where these storms might cause energy-producing platforms to be evacuated and supplies to be shut in). However, companies have not yet announced significant shut-in production or damage from the weather. On the week the Henry Hub spot price increased 32 cents per MMBtu to $6.13. At the New York Mercantile Exchange (NYMEX), prices for futures contracts also registered significant increases. The futures contract for October delivery rose 63.3 cents per MMBtu on the week to $6.438. Working gas in storage as of Friday, September 7, was 3,069 Bcf, which is 9.3 percent above the 5-year (2002-2006) average. The spot price for West Texas Intermediate (WTI) crude oil recorded yet another record high, increasing $4.11 per barrel on the week to $79.85, or $13.77 per MMBtu.

Prices:

Spot natural gas prices moved higher in four of five trading sessions this week as anxiety increased over possible supply disruptions from tropical storms affecting the Gulf of Mexico production region. As of this writing, shut-in production or damage to infrastructure from Hurricane Humberto, if any, has not been reported. However, numerous companies said they expected little or no disruption of operations from the storm. Nonetheless, attention is shifting to a growing storm (now simply referred to as Tropical Depression 8) nearing the Caribbean but still many days away from landfall. Outside of storm-related developments, more moderate temperatures replaced summer-like conditions in much of the East this past weekend, likely reducing weather-related demand. On the week, the spot price at the Henry Hub increased by 32 cents per MMBtu, or close to 6 percent, to $6.13. Other spot prices along the Gulf Coast and in East Texas registered similar gains between 19 and 31 cents per MMBtu, although prices at markets associated with delivery into Florida (where natural gas is primarily used as a fuel for power generation to meet air-conditioning needs) dropped along with the occurrence of more moderate temperatures in the State. In fact, the price for spot deliveries in Florida was $6.74 per MMBtu yesterday, which was lower on the week by $1.23 (but still the highest in the country). The average price in the Northeast yesterday was 23 cents higher than the previous Wednesday at $6.44 per MMBtu. The price of gas trading at Niagara, New York, off Tennessee Gas Pipeline moved up $0.35 per MMBtu, the largest increase in the region, to an average of $6.34. Precipitous price declines again characterized spot trading at Rockies market locations. While many producers have sold supplies on forward markets and as a result are not affected directly by current spot trading activity, the lack of available pipeline transportation out of theregion has created extremely volatile pricing on the spot market (with declines in prices more often than not offsetting any increases this week). The average price in the Rockies region fell $0.20 per MMBtu to $2.52. However, some market centers in the Rockies recorded decreases exceeding 50 cents per MMBtu, and average prices below $1 have become common at many locations this month.  

Concerns over possible supply disruptions from tropical storms also boosted prices at the NYMEX, for the moment easily subsuming the perception of ample underground storage supplies (which for the first time since 1990 exceeded 3,000 Bcf by the end of August) for the upcoming winter. The price of the near-month contract (for October delivery) increased 63.3 cents per MMBtu, or 10.9 percent, during the report week, settling at $6.438 yesterday. Most of the gain on the week came yesterday (September 12), with the near-term contract spiking more than 50 cents per MMBtu as Hurricane Humberto formed on the Gulf Coast. A significant gain of 39 cents per MMBtu in the price of the near-term contract also occurred on Monday, following news of a series of pipeline explosions in the eastern Mexican state of Veracruz. Terrorists have claimed responsibility for the event. Although traders in the United States responded to the news with much trepidation over supply security and increased demand for U.S. exports to Mexico, the long-term implications of these outages for U.S. markets would appear limited with U.S. pipeline markets not currently integrated well with the Veracruz pipeline grid. The October contract price of $6.438 per MMBtu is the highest settlement for the October contract since mid-August. Priced at this level, the October 2007 contract is trading $2.24 higher than the settlement price of the October 2006 contract, the price of which fell significantly as the possibility of supply disruptions from hurricanes diminished through the month of September that year. The same could occur this year, but recent storm activity in the Gulf and the Atlantic has the market still concerned. The October 2007 contract also is priced $1.01 per MMBtu higher than the expiration price of the September 2007 contract. The 12-month strip, which is the average price for futures contracts over the next 12 months, closed yesterday at $7.76 per MMBtu, an increase of 35 cents since last Wednesday. Currently, the highest-priced contract in the 12-month strip is the February 2007 contract, which closed yesterday at $8.297 per MMBtu, a premium of $2.167 to yesterday's Henry Hub price.  

Recent Natural Gas Market Data

 Storage:

Working gas in underground storage as of September 7 was 3,069 Bcf, which is 9.3 percent above the 5-year average inventory level for the report week, according to EIA's Weekly Natural Gas Storage Report (see Storage Figure).  The implied net injection for the week was 64 Bcf, which was significantly lower than both the 5-year average net injection of 88 Bcf and last year's net injection of 103 Bcf. As a result, the difference between current inventory levels and the 5-year average decreased to 260 Bcf, and current inventories match last year's level. The latest cooling degree-day (CDD) statistics published by the National Weather Service for the period roughly coinciding with the storage week indicate that weather-related gas demand likely was higher than normal in all Census regions except the West South Central and New England regions. For the United States as a whole, CDDs totaled 29 percent more than normal and 53 percent more than the corresponding week last year. The large temperature deviations above both last year's level and normal suggest demand for natural gas as a fuel for power generation to meet air-conditioning needs would have been larger this year compared with last year's or normal consumption levels. (see Temperature Maps)  

Other Market Trends:

EIA Releases September 2007 Short-Term Energy Outlook: In its latest Short-Term Energy Outlook (STEO), released September 11, the Energy Information Administration (EIA) projects that the Henry Hub spot price will average about $7.31 per thousand cubic feet (Mcf) in 2007 and $8.07 per Mcf in 2008. After surpassing 3.0 trillion cubic feet (Tcf) at the end of August, working natural gas in storage is projected to exceed 3.4 Tcf at the end of October. Total natural gas consumption is expected to increase by 4.5 percent in 2007 because of increased use in the residential, commercial, and electric power sectors. While natural gas production in the Federal Gulf of Mexico is expected to decrease in 2007 by 4.3 percent, production in the Lower-48 onshore region is expected to increase by 1.7 percent because of growth during the second quarter. Liquefied natural gas (LNG) imports in 2007 are expected to increase by about 48 percent above the volume imported in 2006. Total LNG imports in 2007 and 2008 are projected to reach 860 and 1,020 billion cubic feet, respectively.  

Natural Gas Transportation Update:

• Storage overview. As the injection season nears its end and natural gas storage inventories continue to reach record levels, several pipeline companies have issued restriction notices to interruptible storage service (ISS) customers. Questar Pipeline Company announced that as of September 8, it no longer will accept injection nominations at the Clay Basin storage facility in Utah under the ISS agreements. Based on the inventory level and projected injection rates, Questar also required ISS storage holders to begin withdrawing ISS working gas on the same day. While shippers have 30 days to complete the withdrawal of their inventory, they can also transfer volumes of natural gas to firm storage service accounts. Similarly, Texas Gas Transmission Company (TGT) notified its ISS customers on Friday, September 7, that its entire storage capacity is reserved under firm storage service agreements. The pipeline added that customers covered by an ISS agreement are required to remove their natural gas inventory by October 31, 2007. Any ISS inventory remaining in the TGT storage facilities at the end of gas day October 31 will be subject to an operational flow order (OFO) penalty. Colorado Interstate Gas Company also issued an OFO on Wednesday, September 12, as a result of an extremely high load factor at its storage facilities. The OFO requires that ISS customers withdraw the larger of either 10 percent or 5,000 decatherms (Dth) of their current inventory. The pipeline stated that its total storage inventories are at or near operational field limits, including at the company's largest field, Ft. Morgan in Morgan County, Colorado. Because of the current conditions, the pipeline does not have the ability to absorb imbalances caused by differences between scheduled receipts and deliveries. As stated in an earlier issued strained operating condition notice, capacity for ISS remains unavailable.
• Northwest Pipeline Corporation completed the anomaly repairs south of the Muddy Creek compressor station restoring the Muddy Creek South constraint point in Wyoming to design capacity on Friday, September 7. Nonetheless, in order to preserve the pipeline's storage balance at the Jackson Prairie facility in Lewis County, Washington, Northwest asked shippers to keep their nominations at or below 440,000 Dth at the Meacham compressor station.
• Southern Natural Gas Company announced that the 20-inch Gate 6 Toca Loop line in Louisiana is out of service, and the company anticipates that it will return to service at the end of October. Furthermore, the 20-inch Main Pass Franklinton line, also located in Louisiana, was expected to return to service by September 18. However based on pressure restrictions issued by the Pipeline and Hazardous Materials Safety Administration (PHMSA), the return to service date is currently unknown. As a result of the outage on the Franklinton line, the Bayou Gentilly and Delacroix points in Louisiana also will remain out of service for the same duration.

Short-Term Energy Outlook