Natural Gas

Overview: Thursday, October 4, 2007 (next release 2:00 p.m. on October 11, 2007)

Natural gas spot and futures prices generally increased this report week (Wednesday to Wednesday, September 26 - October 3), as tropical storms threatened to disrupt supplies yet again. Temperatures also were warmer than normal in many areas of the country, likely increasing demand for natural gas as a fuel for electric power. On the supply side, preparations for the winter peak demand period continue with growing underground storage inventories. Nonetheless, concerns are growing over the slowing pace of liquefied natural gas (LNG) imports, which have fallen off significantly as cargos are diverted to Europe and Asia. In September, LNG likely averaged about 1.4 Bcf per day, which is much below the average 2.5 Bcf per day or more that prevailed for much of the time since spring. On the week, the Henry Hub spot price increased 48 cents per MMBtu to $6.96. At the New York Mercantile Exchange (NYMEX), prices for futures contracts also registered significant increases. The futures contract for November delivery rose 23.1 cents per MMBtu on the week to $7.277. Working gas in storage as of Friday, September 28, was 3,263 Bcf, which is 7.5 percent above the 5-year (2002-2006) average. The spot price for West Texas Intermediate (WTI) crude oil decreased $0.34 per barrel on the week to $79.97, or $13.79 per MMBtu.  

 Prices:

Spot natural gas prices moved higher this week as storm activity continued in the Gulf of Mexico region. As of this writing, thunderstorm activity is continuing in the eastern Gulf and development of a tropical storm appeared possible, but shut-in production has not been reported. During this hurricane season to date, there have been nine named-storms in the Atlantic, but limited disruption to supplies for U.S. producers. Currently, other than the storm activity in the eastern Gulf, there is at least one more low pressure system near the Bahamas. The National Weather Service has said that development of the system is possible. On the week, the spot price at the Henry Hub increased by 48 cents per MMBtu, or 7.4 percent, to $6.96. This is the highest average price at the Henry Hub since August 17, 2007. Spot prices elsewhere along the Gulf Coast in Louisiana registered similar gains, with increases ranging between 44 and 69 cents per MMBtu. Spot prices in East Texas increased significantly on the week, likely in part because of higher demand for electric power from a heat wave in the State. On the week, the price at Carthage, Texas, gained $1.02 per MMBtu to $6.93. The price at the Houston Ship Channel rose to $7.06 per MMBtu on the week, yielding a rare premium of 10 cents to the Henry Hub price. Prices also increased significantly at markets associated with delivery into Florida, where natural gas is used primarily as a fuel for power generation to meet air-conditioning needs. In fact, the price for spot deliveries in Florida was $7.90 per MMBtu (the highest in the country) yesterday, which was higher on the week by $0.97. The average price in the Midwest yesterday was 64 cents higher than the previous Wednesday at $7.04 per MMBtu. Record high temperatures are expected in parts of the Midwest today (Thursday, October 4). Rockies prices this week increased significantly at most market locations, possibly resulting from an increase in heating demand caused by nighttime temperatures in the 40s in some locales. The average price in the Rockies region increased $1.75 per MMBtu to $4.84. However, this is still $1.70 per MMBtu less than the Henry Hub spot price.    

 
Concerns over possible supply disruptions from tropical storms and expected increases in weather-related demand likely contributed to higher prices at the NYMEX. The price of the near-month contract (for November delivery) increased 23.1 cents per MMBtu, or 3.3 percent, during the report week, settling at $7.277 yesterday. This week's largest gain came Tuesday (October 2), with the near-term contract increasing almost 38 cents per MMBtu as a storm moved into the eastern Gulf region. At its current price level, the November 2007 contract is trading $0.85 per MMBtu higher than the settlement price of the October 2007 contract ($6.423) and about 12 cents higher than the November 2006 settlement price ($7.153). The 12-month strip, which is the average price for futures contracts over the next 12 months, closed yesterday at $7.90 per MMBtu, an increase of about 14 cents since last Wednesday. Currently, the highest-priced contract in the 12-month strip is the February 2008 contract, which closed yesterday at $8.285 per MMBtu, a premium of $1.33 to yesterday's Henry Hub price.

 Recent Natural Gas Market Data

Storage:

Working gas in underground storage was 3,263 Bcf as of September 28, which is 7.5 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 57 Bcf, which was lower than both the 5-year average net injection of 68 Bcf and last year's net injection of 74 Bcf. Current inventory levels exceed the 5-year average level for this time of year by 227 Bcf. However, they now lie 54 Bcf below the level last year at this time. 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 was likely higher than normal in much of the country. Overall temperatures during the period were significantly above normal and the level of the corresponding week last year (see Temperature Maps). This weather pattern suggests demand for natural gas as a fuel for power generation to meet air-conditioning needs was larger this year compared with last year's or normal consumption levels.      

Other Market Trends:

MMS Holds Lease Sale for Offshore Tracts in the Central Gulf of Mexico: On October 3, the Minerals Management Service (MMS) announced that the Central Gulf of Mexico Oil and Gas Lease Sale 205 garnered $2.9 billion in high bids, the second-highest total of high bids in U.S. leasing history. The agency received a total of 1,428 bids on 723 tracts.In this sale, 5,359 blocks were offered comprising approximately 28.7 million acres in Federal areas offshore Louisiana, Mississippi, and Alabama. About 40 percent of the tracts receiving bids are in water depths of more than 5,249 feet or 1,600 meters. The deepest tract to receive a bid is Amery Terrace, Block 206 in a water depth of 11,148 feet (3,398 meters). The top bid in the sale was by Shell Offshore Incorporated for block 7 at $90.5 million. The top bidders in the sale included Shell Offshore Incorporated; Chevron U.S.A. Incorporated; Marathon Oil Company; Cobalt International Energy, L.P.; and Murphy Exploration & Production Company. The high bids on each block will go through an evaluation process before a lease is awarded to ensure that the public receives fair market value.  

 Natural Gas Transportation Update:

• Storage overview. Pipeline companies continue to issue restriction notices to their storage customers as they have over the past few weeks. El Paso Natural Gas Company announced that there was a potential for a high-linepack condition on its system as of September 26. Injections at the Washington Ranch storage facility in New Mexico were at maximum level and linepack was about 7.76 Bcf.Similarly, Texas Gas Transmission Company (TGT) declared an operational flow order (OFO) in connection with its September 7 announcement that all interruptible storage service (ISS) customers must remove their inventories from the storage field by October 31. Any remaining ISS inventories will become TGT property and will be subject to a penalty of the greater of $50 per MMBtu or three times the highest average weekly price during October. At the same time, several maintenance projects are affecting storage injections. For example, Northwest Pipeline GP is conducting the annual bottom-hole pressure test between October 1 and 5, during which no injections or withdrawals will be available at the Jackson Prairie storage facility in southwestern Washington. Questar Pipeline Company also announced that injection capacity at its Clay Basin storage facility in Utah was reduced to 290,000 decatherm (Dth) per day for Saturday, September 29. The capacity reduction was a result of high inventory and increased reservoir pressure.
• ANR Pipeline Company performed unplanned engine repairs at the Sandwich compressor station on the northern fuel segment (ML-7) in Illinois between September 27 and October 2, 2007. During this time, the pipeline could only schedule firm primary nominations through the location.
• Pacific Gas and Electric Company issued a systemwide Stage 2 high-inventory OFO for September 29 on its California Gas Transmission system. Penalties were set at $1 per Dth for quantities in excess of 12 percent of positive daily imbalances.

Short-Term Energy Outlook