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Overview: Thursday, November 1, 2007 (next release 2:00 p.m. on November 8, 2007)
Since Wednesday, October 24, natural gas spot prices increased at virtually all markets in the Lower 48 States. Prices at the Henry Hub rose $1.16 per MMBtu, or 19 percent, since Wednesday to $7.26 per MMBtu. At the NYMEX, the futures contract for December delivery at the Henry Hub settled yesterday (October 31) at $8.33 per MMBtu, rising 67 cents or 8 percent since Wednesday, October 24. Natural gas in storage was 3,509 Bcf as of October 26, which is 8.4 percent above the 5-year average (2002-2006), marking the first time working gas stocks exceeded 3,500 Bcf, and breaking a 17-year-old record. The spot price for West Texas Intermediate (WTI) crude oil increased $5.86 per barrel on the week (Wednesday-Wednesday) to $94.16 per barrel or $16.23 per MMBtu.
Natural gas spot prices increased on the week (Wednesday-Wednesday) at virtually all market locations, with increases ranging from $0.44 to $1.66 per MMBtu. Colder temperatures across large portions of the Lower 48 States and record-high crude oil prices likely contributed to the price spikes. Continuing tightness in the crude oil markets and increased geopolitical risks resulted in new record-highs as WTI crude oil prices passed the $90 per barrel mark for the first time on October 25 to $92.09 per barrel, and averaged $94.16 per barrel yesterday (October 31). The largest increases in natural gas prices since Wednesday, October 24, occurred principally in the Rocky Mountains, Northeast, Midwest, and Louisiana regions, where prices climbed by more than $1 per MMBtu on average. Although the Rocky Mountain region posted the largest average regional increase since Wednesday, October 24, climbing by $1.19 per MMBtu or 36 percent on average, average prices in the region remained the lowest in the Lower 48 States at $5.42 per MMBtu, because of transportation constraints. Meanwhile, prices in the Northeast region were the highest in the Lower 48 States at $7.67 per MMBtu, after increasing by $1.16 per MMBtu, or 18 percent, since Wednesday, October 24. The smallest price increases for the week principally occurred in the Florida and Arizona/Nevada regions where prices climbed 49 and 55 cents per MMBtu, respectively.
At the NYMEX, prices for the futures contracts for delivery in each of the next 12 months increased, with the 12-month futures strip (December 2007 through November 2008) rising about 51 cents per MMBtu, or about 6 percent, since last Wednesday, October 24. The futures contract for December delivery settled yesterday (October 31) at $8.33 per MMBtu, climbing 67 cents per MMBtu, or 9 percent, since Wednesday, October 24. The prices of the NYMEX futures contract for delivery at the Henry Hub during the remaining 2007-2008 heating season months (December 2007 through March 2008) increased by 62 cents per MMBtu, or 8 percent, on average since last Wednesday. Overall, the 12-month futures strip (December 2007 through November 2008) traded at a premium of about $1.15 per MMBtu relative to the Henry Hub spot price, averaging $8.405 per MMBtu as of Wednesday, October 31. The futures contract for November delivery at the Henry Hub expired on Monday, October 29, at $7.269 per MMBtu, increasing 35 cents per MMBtu, or 5 percent, since becoming the near-month contract on September 27.
Recent Natural Gas Market Data
Working gas in storage hit a record level of 3,509 Bcf as of Friday, October 26, which is 8.4 percent above the 5-year average inventory level for the report week, according to EIA’s Weekly Natural Gas Storage Report (see Storage Figure). At 3,509 Bcf, working gas stocks climbed past the 3,500 Bcf mark for the first time, exceeding the previous all-time record level of 3,472 Bcf reported for the end of November 1990. Stocks were 56 Bcf above the 3,453 Bcf in storage at this time last year and exceeded the 5-year average by 272 Bcf. The net injection into working gas storage of 66 Bcf differs from the more typical pattern of withdrawals for the week. The 66 Bcf addition compares with the 5-year average net withdrawal of 11 Bcf and last year’s net withdrawal of 5 Bcf for the same report week. Temperatures in the Lower 48 States were moderate and roughly 5 degrees warmer than normal (see Temperature Maps). These moderate temperatures limited natural gas demand, thereby contributing to larger net injections of natural gas into storage.
Other Market Trends:
EIA Releases The Natural Gas Annual 2006: The Energy Information Administration (EIA) released the Natural Gas Annual 2006 (NGA2006) on October 31, which provides information on the supply and disposition of natural gas in the United States. Production, transmission, storage, deliveries, and price data are published by State for 2006. State summary data are also presented for 2002 to 2006. The NGA2006 includes a supplemental report, which notes that warmer-than-average temperatures dominated the U.S. natural gas market in 2006. Favorable weather during the heating season along with a slight increase in U.S. marketed production of natural gas contributed to higher-than-average inventories, resulting in a 13.6-percent decrease in the average wellhead price in 2006. Despite minimal storm activity in the U.S. Gulf of Mexico, production in this region was 7.9 percent lower than in 2005. Marketed production in the United States increased by 2.4 percent in 2006, however, largely because of the 4.9-percent increase in marketed production in Texas. Lower heating demand contributed to a 1.6-percent decrease in total consumption, although warmer-than-normal temperatures during the summer months boosted natural gas demand by the electric power sector.
GAO Releases Report on CFTC Oversight of Energy Derivatives Markets: As part of the Commodity Futures Trading Commission’s (CFTC) reauthorization process, the U.S. Government Accountability Office (GAO) in its October 24 report recommended that Congress expand the scope of CFTC’s authority over energy derivatives trading, particularly in exempt commercial markets. The report was released in light of substantial increases in energy prices for crude oil, heating oil, gasoline, and natural gas since 2002, raising questions about the role of derivative markets and the scope of CFTC’s authority. During this period, increasing numbers of noncommercial participants became active in the futures markets (including hedge funds) and the volume of energy futures contracts traded also increased. Simultaneously, the volume of energy derivatives traded outside of traditional futures exchanges increased significantly. Because these developments took place concurrently, the effect of any individual trend or factor on energy prices is unclear. CFTC’s oversight is focused on the operations of traditional futures exchanges, such as the New York Mercantile Exchange (NYMEX). However, an increasing amount of energy derivatives trading also is taking place on markets that are exempt from CFTC’s oversight, such as the over-the-counter markets or various electronic platforms. Furthermore, despite its oversight authority over futures exchanges, information collected and reported on these exchanges has not kept pace with changing market conditions. To improve the transparency of market activities and the functioning of CFTC’s oversight, the GAO recommends that CFTC improve the usefulness of the information provided to the public, in addition to better documenting its monitoring activities and developing more outcome-oriented performance measures for its enforcement program.
NEB Issues Winter Outlook for Energy Markets: In its recent winter outlook, Canada’s National Energy Board (NEB) estimates that North American energy supply inventories are more than adequate for the upcoming winter. According to the October 30 report, the NEB states that even if there is a cold winter, high levels of natural gas in storage will be sufficient to meet high heating demand, as both Canada and the United States are entering the heating season with above average levels of natural gas in storage. Natural gas futures prices are expected to remain between $6 and $8 per MMBtu this winter. If the upcoming winter is exceptionally cold, however, the price of natural gas could rise above $8 per MMBtu. Furthermore, the price of natural gas in North America continues to differ significantly from its traditional pricing relationship with crude oil, and thus high crude oil prices are not pushing the price of natural gas upward significantly. Stronger U.S. domestic natural gas production and higher liquefied natural gas (LNG) imports into the United States have offset recent lower Canadian production. Overall, natural gas supply in North America is projected to be fairly stable over the winter, and should begin increasing again late in the season. The outlook further highlighted how storage supplies, extreme weather conditions, and geopolitical events can impact energy prices over the coming winter.
Natural Gas Transportation Update:
<![if !supportLists]>· <![endif]>Southern California Gas Company declared a high-linepack operational flow order (OFO) for Friday and Saturday, October 26 and 27. The company assessed buy-back charges for deliveries onto its system in excess of 110 percent of the shippers’ actual usage on the OFO days.
<![if !supportLists]>· <![endif]>Pacific Gas and Electric Company issued a systemwide stage 2 high inventory OFO for October 26 and 27. Penalties were set at $1 per decatherm (Dth) for volumes exceeding 11 percent tolerance on positive daily imbalances. The company reissued the OFO for Wednesday, October 31, but changed the tolerance level to 5 percent on positive daily imbalances.
<![if !supportLists]>· <![endif]>Southern Natural Gas Company reported completing the maintenance on its 30-inch White Castle-Franklinton Loop line located onshore in southern Louisiana. Capacity on the West Leg was raised to 720,000 Dth per day as of Friday, October 26. The company also reminded its shippers that the previously declared force majeure remained in effect, which was a result of repairs to one of the units at the White Castle compressor station. The force majeure is expected to remain in place until mid-January 2008.
<![if !supportLists]>· <![endif]>Northwest Pipeline Company announced that it completed the majority of the anomaly investigations for the northern section of the mainline between the Muddy Creek North constraint point and Kemmerer compressor station in Wyoming. As a result, Northwest increased the available capacity at the Muddy Creek North constraint point from 567,000 Dth per day to 647,000 Dth per day. The pipeline added that additional anomaly investigations for the southern section of the mainline are ongoing until further notice.