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Natural Gas Weekly Update

Natural Gas Weekly Update Text
Released: October 9, 2008
Next Release: October 16, 2008
Overview (Wednesday, October 1 to Wednesday, October 8)

  • Natural gas spot prices in the Lower 48 States this report week declined to their lowest levels this year even as disruptions in offshore Gulf of Mexico production continue in the aftermath of Hurricanes Ike and Gustav. During the report week, the Henry Hub spot price decreased $0.83 per million Btu (MMBtu) to $6.58.

  • At the New York Mercantile Exchange (NYMEX), the price of the near-term contract (November 2008) decreased to its lowest price since September 2007, closing at $6.742 per MMBtu yesterday (October 8). The net change during a week in which the price decreased each trading day was $0.986 per MMBtu.

  • As of Friday, October 3, working gas in underground storage totaled 3,198 billion cubic feet (Bcf), which is 2.2 percent above the prior 5-year (2003-2007) average.

  • The price of crude oil declined steeply, decreasing 9.5 percent during the report week to below $90 per barrel for the first time since February 7. The West Texas Intermediate (WTI) price yesterday averaged $88.91 per barrel, or $15.33 per MMBtu, which was $9.32 per barrel lower than the previous Wednesday.

NYMEX Natural Gas Futures Near-Month Contract Settlement Price, West Texas Intermediate Crude Oil Spot Price, and Henry Hub Natural Gas Spot Price Graph

More Summary Data

Spot natural gas prices moved lower this week at trading locations across the Lower 48 States, as fear of a slowing economy and turmoil on Wall Street affected the entire energy industry. Current instability in the banking sector is expected to have a variety of longer-term effects on the natural gas industry (including access to credit). This would considerably dampen demand for energy in all consuming sectors, but particularly affect demand in the industrial sector (where natural gas is the primary fuel for close to 40 percent of energy consumption). As concerns over the economy evolved this week, the price at the Henry Hub in Erath, Louisiana, fell to its lowest point since November 9, 2007, averaging $6.58 per MMBtu yesterday. On the week, the Henry Hub price was 83 cents per MMBtu lower, or about 11 percent less than on the previous Wednesday. On a regional basis, spot markets along the Gulf Coast in Louisiana and East Texas registered an average price decrease of $0.82 and $0.78 per MMBtu, respectively.

In addition to concerns over the economy possibly limiting demand, many of the supply-side factors that contributed to the decline in prices this summer remain firmly in place. Recent price decreases have been related to an improved outlook for domestic production. According to the September edition of EIA’s Natural Gas Monthly, domestic production has increased 8.5 percent during the first 7 months of 2008 in comparison with the same time period in 2007. The percentage growth for the year-to-date volumes likely will decline as data are reported for the months affected by Hurricanes Gustav and Ike. In fact, severe reductions in supplies from the Gulf of Mexico offshore continue with the Minerals Management Service (MMS) reporting that 2.9 Bcf per day of production remains shut-in in the Federal Gulf of Mexico as of October 8. Nonetheless, most of the shut-in production is expected to return in the near term.

The lowest regional prices on the week occurred again in the Midcontinent region, where the average price fell 84 cents per MMBtu to $3.19. Available Midcontinent supplies were abundant during the week as regional storage facilities are reported to be nearly full and pipelines have been experiencing inordinately high levels of linepack. Price decreases were widespread in the region, with the largest ($1.74 per MMBtu) occurring for supplies on Northern Natural Gas for delivery in Clifton, Kansas. The price for deliveries to Panhandle Eastern Pipe Line in the Midcontinent region during trading yesterday (Wednesday) was reported to be $2.85. Prices in the Rocky Mountains region also were weak with a maximum price of only $2.83 per MMBtu for spot trading in the producing areas (excluding the import border crossings and the Stanfield interconnection between Oregon and Washington).

Spot Prices

At the NYMEX, the price of the near-month contract (for November delivery) decreased $0.986 per MMBtu during the report week to $6.742. This decline also is likely related to concerns over the economy and growing supplies in storage. The daily closing price decreased each trading day during the report week. The near-month contract is now priced at about half of the peak price of $13.58 for the near-term contract this summer (reached on July 3 for trading of the August 2008 contract). Relative to the past 2 years, the current contract price for November is about 10 cents per MMBtu below the November 2007 contract price of $6.85 at this time last year but 31 cents higher than the November 2006 contract.

The average futures contract price for the upcoming heating season (November 2008 through March 2009) decreased $0.88 per MMBtu on the week to $7.20. This price is $0.62 per MMBtu more than yesterday’s Henry Hub spot price, suggesting an economic incentive to inject natural gas into storage. Beyond March 2009, prices for contracts through the end of the 12-month futures strip (November 2008–October 2009) decreased but at smaller increments ranging between 66 cents and 72 cents per MMBtu. The 12-month strip settled yesterday at $7.39 per MMBtu, which is 76 cents lower than last week.

Wellhead Prices Annual Energy Review
More Price Data

Working gas in storage increased to 3,198 Bcf as of Friday, October 3, 2008, according to EIA’s Weekly Natural Gas Storage Report (see Storage Figure). This report week’s implied net injection of 88 Bcf is higher than both the 5-year average injection of 69 Bcf and last year’s injection of 68 Bcf. As a result, current inventories are now 2.2 percent above the 5-year average level of 3,129 Bcf. The difference between current inventories and levels last year at this time decreased to 3.5 percent, or 117 Bcf. The net injection came during a week in which about 26 Bcf of supplies were reported shut-in in the Federal waters of the Gulf of Mexico and in Louisiana in the aftermath of Hurricanes Gustav and Ike. Reduced demand related to moderate temperatures on a widespread basis at least partially offset the effects of the large volume of supplies that were shut-in during the week, allowing for the substantial build in storage.

This week’s injection partly reflects moderate temperatures across the United States, which kept demand for heating and cooling needs low. For the week ending October 2, 2008, temperatures were slightly warmer-than-normal. However, the absence of substantial amounts of heating or cooling degree-days for the week ending October 2 indicate minimal weather-related load for the country as a whole. (see Temperature Maps and Data)

Storage Table

More Storage Data
Other Market Trends

EIA Releases Its Winter Fuels Outlook. Average household expenditures for all space-heating fuels are projected to be $1,137 this winter (October 1 to March 31), a 15-percent increase over the estimated $986 spent last winter, according to EIA’s Short-Term Energy and Winter Fuels Outlook released on October 7. The largest increases, 18 percent, will be in households using natural gas. About 52 percent of all households nationwide depend on natural gas as their primary heating fuel. The projected expenditure increases primarily reflect higher prices, although colder weather than last winter also is expected to contribute to higher fuel use in many areas. However, fuel expenditures for individual households are highly dependent on market size, the size and energy efficiency of individual homes and their heating equipment, and thermostat settings. Households heating primarily with natural gas are expected to spend an average of $155 (18 percent) more this winter compared with the 2007-2008 winter season. The increase in natural gas expenditures reflects the combined effects of a 17-percent increase in price and a 1-percent increase in consumption. Overall this winter, total residential consumption of natural gas in the United States is expected to increase by 3.5 percent year-over-year based on the projected 2.4-percent increase in heating degree-days. In addition to weather, worsening economic conditions add significant uncertainty to the forecast, particularly for the industrial sector. In annual terms, consumption in the industrial sector is expected to increase by 1.0 percent in 2008 and 1.1 percent in 2009. Total U.S. marketed natural gas production is expected to increase by 6.7 percent in 2008 and by 4.2 percent in 2009. The Henry Hub spot price averaged $7.88 per thousand cubic feet (Mcf) in September, $0.62 per Mcf below the average spot price in August. Despite hurricane damage to supply infrastructure in the Federal Gulf of Mexico, the recent decline in prices was the result of demand loss associated with these same hurricanes, moderate temperatures, lower oil prices, and uncertainties about future economic growth. On an annual basis, the Henry Hub spot price is expected to average about $9.67 per Mcf in 2008 and $8.17 per Mcf in 2009, compared with $7.17 per Mcf in 2007.

EIA Releases Report on U.S. Peak Storage Capacity. The Energy Information Administration (EIA) has released a special report titled Estimates of Peak Underground Working Gas Storage Capacity in the United States, which provides national and regional updates to estimates of total natural gas storage capacity as of mid-2008. The estimates for the national and regional peak capacity are based on the maximum reported working gas volumes for individual active facilities from January 2003 through May 2008. According to the report, peak working gas storage capacity nationwide rose by 86 Bcf from the previous year’s level to 3,789 Bcf in mid-2008 and was the equivalent of 92 percent of working gas capacity. The increase in estimated peak storage capacity is attributable to capacity at new facilities, expansions at previously built facilities, and greater use of already existing storage facilities during the past year. Regional peak capacity values range from a low of 490 Bcf in the West Region to a high of 2,153 Bcf in the East Region. The estimated peak working gas capacity is 96.8 percent of working gas capacity in the East Region and 91.6 percent in the Producing Region. The relative magnitude of estimated peak capacity in the West Region is 74.2 percent of working gas capacity. The lower average use of working gas capacity in the West is due to a number of still-active fields that have shifted their primary role from seasonal storage to other functions, such as pipeline load balancing, and to fields that are being drawn down to be taken out of service.

Natural Gas Transportation Update

  • The Rockies Express Pipeline LLC (REX) has reassessed its progress in constructing REX East and the associated projected in-service dates. The pipeline reported that there were delays in securing permits and regulatory approvals for construction activity, in addition to weather-related delays. According to the latest estimates, REX East is expected to begin service on April 1, 2009, with an initial capacity of 1.6 million decatherms (Dth) per day. This initial capacity will encompass deliveries to Natural Gas Pipeline Company of America (in Moultrie County, Illinois), Trunkline (in Douglas County, Illinois), Midwestern (in Edgar County, Illinois), Ameren (in Moultrie County, Illinois), and Panhandle Eastern Pipeline (in Putnam County, Indiana). Service to Lebanon, Ohio, is expected to begin on June 15, 2009, with a capacity of 1.6 million Dth per day. Service of the fully powered REX East pipeline to Clarington, Ohio, is projected to commence on November 1, 2009, with a capacity of 1.8 million Dth per day. When completed, REX East will be a 638-mile, 42-inch-diameter pipeline that extends between REX West in Audrain County, Missouri, and Monroe County, Ohio.

  • Questar Pipeline Company has reported that it shut in the Clay Basin storage facility on Wednesday, October 8, for injection testing. The shut-in of the Utah facility will last until October 14, and during the outage only transfer nominations will be processed. The outage will result in the loss of the pipeline’s ability to use linepack to take imbalance make-ups from shippers or to make pay back imbalances to the shippers.

  • As of October 3, Discovery Gas Transmission LLC informed its customers that repairs to its 30-inch-diameter mainline are on track to meet the original completion date, which is expected to be completed within 60 days. Discovery also reported that the 18-inch-diameter gathering line that ties into the mainline is currently undergoing additional damage assessments. The gathering line was severed and displaced as a result of Hurricane Ike. The pipeline expects repairs to be completed 30 days after repairs to the mainline are completed. Discovery continues to accept gas flow from receipt and delivery points onshore.

  • Tennessee Gas Pipeline Company reported that portions of the Bluewater segment and associated facilities of the pipeline system are expected to be repaired and operational by mid to late October. This segment of pipeline experienced significant damage as a result of Hurricane Ike, including leaks along the pipeline, damage to platform interconnects, and damage to the separation and dehydration facility.

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.