Natural Gas

Overview: Thursday, October 25, 2007 (next release 2:00 p.m. on November 1,2007)

Natural gas spot and futures prices generally decreased this report week (Wednesday to Wednesday, October 17-24), as moderate weather prevailed across much of the Lower 48 States. Although tropical storms entering the Gulf of Mexico production region—evidenced by a system currently moving through the Caribbean—could still disrupt supplies, the passing of at least the most active part of the hurricane season may help explain the price declines. On the week the Henry Hub spot price decreased $1.01 per MMBtu to $6.10. At the New York Mercantile Exchange (NYMEX), prices for futures contracts also registered significant decreases. The futures contract for November delivery declined about 49 cents per MMBtu on the week to $6.972. Working gas in storage is well above the 5-year average for this time year, indicating a healthy supply picture ahead of the winter heating season. As of Friday, October 19, working gas in storage was 3,443 Bcf, which is 7.2 percent above the 5-year (2002-2006) average. The spot price for West Texas Intermediate (WTI) crude oil increased $1.11 per barrel, ending trading yesterday at $88.30, or $15.22 per MMBtu.

Prices:

Spot natural gas prices generally dropped during the past four trading sessions, resulting in significant net declines for this report week. As of this writing, the National Hurricane Center is monitoring a tropical system in the Atlantic (the official hurricane season continues until the end of November). However, to date in this hurricane season, there has been little disruption of supplies from tropical storm activity. Outside of storm-related developments, moderate temperatures likely reduced weather-sensitive demand, as often occurs during the fall “shoulder” season (named for its position between the summer and winter peak demand seasons). On the week, the spot price at the Henry Hub decreased $1.01 per MMBtu, or about 14 percent, to $6.10. Other spot prices along the Gulf Coast and in East and South Texas registered similar decreases of between $0.81 and $1.14 per MMBtu. In the Northeast, where it was warmer-than-normal for much of the week, the average price yesterday (October 24) was $6.51 per MMBtu, which was 93 cents lower than the previous Wednesday. The price of gas off Texas Eastern Transmission in the Northeast decreased to $6.51 per MMBtu, representing the largest decline in the region at $1.04. For the week, price declines in the Rockies, at an average of 70 cents per MMBtu, were generally less than in other regions. Heating demand may have limited the price declines as winter-like weather moved into parts of the Rockies, where temperatures in places such as Denver, Colorado, hit lows in the 30s. Nonetheless, the average price in the Rockies region yesterday was $4.23 per MMBtu, which was $1.87 lower than the Henry Hub price. The price for spot deliveries in Florida was $7.26 per MMBtu yesterday, which was lower on the week by $1.00. However, the Florida price was still the highest in the country as demand remained strong for natural gas as a fuel for power generation to meet air-conditioning load in the State.  

 Futures prices declined at the NYMEX, also likely owing to current moderate temperatures, the perception of adequate storage supplies, and the declining potential for a massive supply disruption from a tropical storm. The price of the near-month contract (for November delivery) decreased 49 cents per MMBtu, or 7 percent, during the report week, settling at $6.972 yesterday. The only daily gain during the week came yesterday (October 24), with the near-term contract increasing 21 cents per MMBtu in part because of forecasts for colder weather. The current November contract price of $6.97 per MMBtu is slightly lower than the November 2006 expiration price of $7.15 and just about a nickel more than the expiration of last month’s (October) contract. The 12-month strip, which is the average price for futures contracts over the next 12 months, closed yesterday at $7.78 per MMBtu, a decrease of about 30 cents since last Wednesday. Currently, the highest-priced contract in the 12-month strip is the February 2008 contract, which closed yesterday at $8.074 per MMBtu, a premium of $1.974 to yesterday’s Henry Hub price. This premium provides a significant economic incentive to put natural gas into storage for delivery during the higher-priced winter time period.

 Recent Natural Gas Market Data

Storage:

Working gas in underground storage as of October 19 was 3,443 Bcf, which is 7.2 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 68 Bcf, which was significantly higher than both the 5-year average net injection of 49 Bcf and last year’s net injection of 24 Bcf. As a result, current inventory levels grew to 232 Bcf above the 5-year average. Current inventories are still below last year’s unusually high levels; however, the difference narrowed to just 15 Bcf. Heating and cooling degree-day statistics published by the National Weather Service for the period roughly coinciding with the storage week indicate that weather-related gas demand was relatively limited in most regions. Heating degree-days for the United States as a whole were 12 percent below normal. Furthermore, temperatures were unusually moderate in regions with large population centers (and associated energy demand) such as in the East North Central Census Division, which includes Chicago. (see Temperat ure Maps)  

Other Market Trends:

EIA Releases Report on Updated Storage Capacity Estimates:The Energy Information Administration’s (EIA) newly-released report, the Estimates of Maximum Underground Working Gas Storage Capacity: 2007 Update, provides an update to an estimate for U.S. aggregate natural gas storage capacity that was released in 2006.A conservative estimate of maximum capacity is about 3,700 billion cubic feet.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.The report also provides estimates from two alternative approaches to estimate the volume of natural gas that can be stored in U.S. underground storage facilities

 EIA Is Soliciting Comments on Proposed Revisions to the EIA-914 Survey:The Energy Information Administration (EIA) published a Federal Register notice on Friday, October 19, soliciting comments from interested parties by December 18, 2007, on proposed revisions to Form EIA-914.Using information collected on Form EIA-914, EIA estimates and disseminates timely and reliable monthly natural gas production data at the national level and for certain States. According to the notice, EIA plans to rename the EIA-914 as the Monthly Natural Gas and Crude Oil Production Report.The proposed revisions include increasing the data elements from two to four by adding crude oil and lease condensate production data elements to the existing data elements of gross natural gas and lease gas production.Additionally, the number of areas reported would expand from 7 to 14.The survey currently collects production data for the Federal Offshore Gulf of Mexico, Louisiana (onshore and offshore), New Mexico, Oklahoma, Texas (onshore and offshore), Wyoming, and other States (the remaining States, including their State offshore areas). The States to be added are Alaska (onshore and offshore), California (onshore and offshore), Federal Offshore Pacific, Colorado, Kansas, Montana, and North Dakota.Currently there are 220 respondents, a sample drawn from a universe of about 8,400 known operators.The proposed changes are expected to increase the number of respondents by 130.

 Natural Gas Transportation Update:

• Florida Gas Transmission Company declared an overage alert day (OAD) on Tuesday, October 23, with a 15-percent tolerance for negative daily imbalances. On October 24 the tolerance for negative daily imbalances was tightened to 5 percent.
• On October 22, Southern Natural Gas Company released a notice reminding shippers, poolers, point operators, and interest owners of a scheduled shut-in so that the pipeline can conduct a test at the Bear Creek Storage Field in Louisiana from October 23 through 29, 2007. The company classified the event as a force majeure, as a result of which Southern will reduce each Contract Storage Service customer's daily injection quantity (DIQ) and daily withdrawal quantity (DWQ) on a pro-rata basis during the shut-in test. Each CSS customer will be allocated 64 percent of its currently effective DIQ and DWQ.
• Tennessee Gas Pipeline Company issued a systemwide operational flow order (OFO) effective October 24 for all holders of balancing party contracts. These customers are required to maintain an actual daily flow rate not exceeding 2 percent or 500 decatherms (Dth), whichever is greater, of scheduled quantities.According to the company, customers will be assessed a rate of $0.2198 per Dth for that portion of physical quantities related to over deliveries into the system by receipt point operators or undertakes from the system by delivery point operators that exceed this tolerance.
• On October 23, Questar Natural Gas Pipeline announced that the fall testing scheduled at the Clay Basin Storage facility in Utah is on schedule.Storage nominations were accepted for gas day October 25, 2007. Injection capacity is 270,000 Dth per day with up to 25,000 Dth per day available for park and loan and up to 30,000 Dth per day on hand to be used as pipeline cushion gas. The withdrawal capacity will be 650,000 Dth.
• Maritimes & Northeast Pipeline (M&NP) released a critical notice on October 23, announcing pipeline maintenance on the U.S. portion of its system has been completed.Effective immediately, the restrictions on forward haul and backhaul nominations flowing through Richmond, Maine, are lifted.
• Dominion Transmission Corporation issued an OFO effective October 24.The company announced that excess deliveries by customers cannot be tolerated because they jeopardize the pipeline’s ability to receive gas for injection into storage as required by service agreements and the FERC tariff.

Short-Term Energy Outlook