Natural Gas

• Natural gas spot prices declined sharply this report week (Wednesday–Wednesday, July 2-9), with the largest decreases generally occurring in consuming regions in the Northeast and Midwest. During the report week, the Henry Hub spot price decreased $1.22 per million Btu (MMBtu) to $12.09.



• At the New York Mercantile Exchange (NYMEX), a trend of rising prices for futures contracts was at least temporarily interrupted. After the August 2008 contract reached a daily settlement price of $13.578 per MMBtu (a record high for this contract) on July 3, the price decreased by $1.57 per MMBtu over the next three trading sessions and ended the week $1.38 lower than last Wednesday. Yesterday’s (July 9) closing price of the August contract was $12.006 per MMBtu.



• During the week ending Friday, July 4, estimated net injections of natural gas into underground storage totaled 90 billion cubic feet (Bcf). Working gas in underground storage as of July 4 was 2,208 Bcf, which is 3.1 percent below the 5-year (2003-2007) average.



• The price of crude oil dropped more than 5 percent during the report week. Leading into the Fourth of July weekend, the West Texas Intermediate (WTI) crude oil price had climbed above $145 per barrel on Thursday. Price declines in the next 3 trading days resulted in a cumulative decline of $7.86 per barrel since Wednesday, July 2. The WTI average price yesterday was $135.88 per barrel, or $23.43 per MMBtu.

Natural gas prices continue to surpass historical norms for this time of year, exceeding $11 per MMBtu at trading locations throughout the Lower 48 States, with the exception of Rocky Mountain market centers. Nonetheless, price decreases during the report week were significant and appeared to represent at least a temporary shift in sentiment toward natural gas market conditions. Before the Independence Day weekend, spot prices at the Henry Hub had breached $13 per MMBtu for the first time since December 2005 in the aftermath of the hurricane season that year. With temperatures relatively moderate this report week for the country as a whole and a decline in the price of crude oil, the net change in the Henry Hub spot price this report week (after 4 consecutive days of price declines) was a decrease of $1.22 per MMBtu, or 9 percent. On a regional basis, spot markets along the Gulf Coast in Louisiana and East Texas registered an average price decrease of $1.19 and $1.16 per MMBtu, respectively. The average regional price yesterday was $12.79 in Louisiana and $12.53 in East Texas.

Many of the factors leading to the runup in prices before the holiday weekend remain a concern in the market, despite the reprieve from rising prices over the past week. During the week, concerns over the path of Hurricane Bertha lessened as the first tropical storm threat of the season turned toward the North Atlantic, likely contributing to the easing in prices. Nonetheless, much of the hurricane season lies ahead, and price volatility has become a regular feature of the natural gas market as storms form and dissipate. In addition, while temperatures during the week were moderate in key consuming regions, the peak summer demand season (from electric generators meeting air-conditioning needs) is underway, bringing increased competition for available supplies. The elevated price level for natural gas also appears related to growing financial investment in many commodities, including metals, agricultural products, and crude oil. Although prices declined during the report week for many commodities, they remain at historical high levels. Even with the decline in price at the Henry Hub during the report week, the spot price at the Henry Hub has increased $4.26 per MMBtu, or 54 percent, since the beginning of 2008.

Temperatures in the Northeast were mild during the report week as storms moved through the region during the Fourth of July weekend, contributing to reduced demand and the largest regional price decrease in the Lower 48 States. The average price in the Northeast region yesterday was $12.79 per MMBtu, which was $1.29 lower than the previous Wednesday. The Northeast has experienced the highest prices in the country (outside Florida), owing in part to pipeline transportation costs for deliveries from the Gulf of Mexico region. With only two exceptions, the average price in the Northeast has exceeded $13 per MMBtu each trading day since the beginning of June. For the week, the average spot price for delivery in New York off Transcontinental Gas Pipe Line (Transco Zone 6-NY) decreased by $1.40 per MMBtu to $13.01, a premium of $0.92 per MMBtu to the price at the Henry Hub.

The pace of deliveries of liquefied natural gas (LNG) imports remains considerably below last year’s volumes. Deliveries are estimated to have been less than 200 Bcf for the first half of the year, which is less than half of the approximately 460 Bcf received last year during the same time period. Most flexible LNG cargoes are heading to Europe and Asia, where buyers continue to purchase LNG at prices higher than those that have prevailed in U.S. markets.

At the NYMEX, the price of the near-month contract (for August delivery) decreased $1.383 per MMBtu during the report week to $12.006, as prices for competing products decreased and the weather outlook appeared to limit demand by electric power generators in the near-term. After a price increase on July 3, declines in futures prices occurred in each of the 3 trading days following the Fourth of July weekend. The downward price pressure appeared related to movements in the crude oil price, which decreased by $7.86 per barrel on the week. Nonetheless, natural gas prices continue to trade above $12 for delivery contracts through the next winter heating season. The highest-priced contract in the futures strip is the January 2009 contract, which closed at $13.127 per MMBtu yesterday. At the end of trading yesterday, the 12-month strip, which is the average for futures contracts over the next 12 months, was priced at $12.097 per MMBtu, a decrease of about $1.05 since last Wednesday.

Working gas in storage increased to 2,208 Bcf as of Friday, July 4, 2008, according to EIA’s Weekly Natural Gas Storage Report (see Storage Figure). This report week’s implied net injection of 90 Bcf is below both the 5-year average injection of 103 Bcf and last year’s injection of 98 Bcf. As a result, current inventories are now below the 5-year average level by an estimated 70 Bcf or 3.1 percent. Further, the deficit between current inventories and levels last year at this time increased to 389 Bcf, or 15 percent. The report week included the Independence Day holiday, which likely reduced demand at least in the industrial sector for 1 day. The reduced demand resulted in a slightly higher injection relative to the previous week but was not enough to allow the net change to reach the 5-year average or previous year’s level. For the week ending June 27, there was an estimated net 85 Bcf injection.

The below-average net injection came during a week when warmer-than-normal temperatures in the Lower 48 States, particularly in the Pacific, New England, and Middle Atlantic Census Divisions, likely generated weather-related demand by power-generators for air-conditioning needs. However, as indicated by National Weather Service degree-day data, the number of cooling degree-days totaled just 1.5 percent above normal for the country as a whole. In general, temperatures remained below levels typical for later in the cooling season with an average overall temperature for the week of just 74 degrees Fahrenheit, less than 1 degree above normal (see Temperature Maps and Data).

EIA Releases July Short-Term Energy Outlook. The price of natural gas, which is currently at very high levels, is expected to increase further by the end of the year and into 2009, according to the Energy Information Administration’s (EIA) Short-Term Energy Outlook (STEO). The natural gas spot price at the Henry Hub averaged $7.17 per thousand cubic feet (Mcf) in 2007 and is expected to average $11.86 per Mcf in 2008 and $11.62 per Mcf in 2009. In June 2008, the average Henry Hub spot price was $13.07 per Mcf, increasing by $1.42 per Mcf over the May level. These price increases occurred despite significant increases in onshore production, as high oil prices and low liquefied natural gas imports continue to put upward pressure on natural gas prices. Furthermore, the amount of natural gas consumed for space cooling was particularly high for June, which registered cooling degree-days that were 23.5 percent above normal. Total natural gas consumption is expected to increase by 2.1 percent in 2008 and by 1.1 percent in 2009. Year-over-year increases are expected in every sector in 2008 and have been largely weather-driven. In 2009, residential and commercial sector consumption is expected to be relatively unchanged from 2008, while natural gas consumption for electricity generation is expected to increase by 3.2 percent. Consumption in the industrial sector is projected to rise by 1.6 percent in 2008 and by 0.6 percent in 2009.

• Southern California Gas Company declared a high-linepack operational flow order (OFO) for July 4 through July 7. High linepack is when the volume of natural gas in the pipeline is sufficiently large to increase the pressure in the pipe to levels that could jeopardize system integrity. The company assessed buy-back charges to transportation customers who delivered more than 110 percent of their actual gas usage into the company’s system while the OFO was in effect.



• Pacific Gas and Electric Company extended a systemwide high-inventory OFO on its California Gas Transmission system through Saturday, July 5. It was initially declared on July 2. However, the pipeline further loosened the tolerance for positive daily imbalances from 13 to 25 percent. The systemwide OFO was instead replaced by a customer-specific OFO, which affected a total of 10 shippers on July 8.



• After a 6-month delay that resulted from structural anomalies, BHP Billiton announced that the deepwater Neptune platform has begun production in the Gulf of Mexico. The $1.2 billion development is designed to produce up to 50 million cubic feet (MMcf) per day of gas and 50,000 barrels of crude oil per day. The Neptune play, which was discovered in 1995, is located on the Western Atwater Foldbelt in water depths that range from 4,200 feet to 6,500 feet about 120 miles off the coast of Louisiana. The field holds an estimated 100-150 million barrels of oil in proved and probable reserves.



• Gulf South Pipeline Company conducted unscheduled maintenance on July 7 and 8 on Unit #3 at the Clarence compressor station in Louisiana. The maintenance resulted in a capacity reduction of 100,000 decatherms per day.



• El Paso Natural Gas Company declared a force majeure event on July 3 after finding that the White Rock #1 turbine in New Mexico had extensive power damage that necessitated a complete teardown of the unit to repair the damage. The force majeure will result in a reduction of 208 MMcf per day through July 25.

See Weekly Natural Gas Storage Report for additional Natural Gas Storage Data.
See Natural Gas Analysis for additional Natural Gas Reports and Articles.
See Short-Term Energy Outlook for additional Natural Gas Prices, Supply, and Demand.