Overview:  Thursday, October 23 2003 (next release 2:00 p.m. on October 30)

Spot price changes were mixed for the week (Wednesday to Wednesday, October 15-22), with markets with declines outnumbering those with increases by about 2 to 1, while futures prices fell significantly.  At the Henry Hub, the spot price declined a nickel for the week, ending trading yesterday at $4.88 per MMBtu.  The NYMEX futures contract for November delivery dropped $0.507 per MMBtu for the week, settling yesterday at $4.924.  EIA reported that inventories were 3,028 Bcf as of Friday, October 17.  This is 0.8 percent greater than the previous 5-year (1998-2002) average for the week.  The spot price for West Texas Intermediate (WTI) crude oil ended a string of four consecutive weeks of price increases with a decline of $1.74 per barrel for the week to $30 per barrel, or $5.17 per MMBtu.

Prices:

For the week, spot prices ended lower at a majority of locations, with declines ranging mostly from about a nickel to a quarter.  Increased prices were seen in the Northeast and scattered points in East Texas and along the Gulf coast, with increases mostly less than a dime.  However, the week-on-week results mask unusually large price swings, particularly the sharp declines on Friday (October 17) and the nearly-as-large increases on Tuesday (October 21).  Generally mild temperatures nationwide, forecasts for still warmer temperatures for the weekend, and many storage facilities registering nearly full had gas backing up in many pipelines, sending spot prices down sharply on Friday.  High-linepack operational flow orders (OFO) for the weekend were called or threatened on a number of pipelines throughout the country.   Spot prices fell across the board by 30 cents per MMBtu or more on Friday, with many declines of 50 cents or more.  The Henry Hub spot price experienced one of the more moderate declines, falling 36 cents to $4.57 per MMBtu.  Declines continued on Monday, pulling prices at Chicago and New York citygates to their lowest levels in 3 and 4 weeks, respectively, at $4.53 and $4.68 per MMBtu.  However, just as abruptly, prices turned around on Tuesday (October 21), owing to forecasts for significantly cooler temperatures beginning Wednesday in the Middle Atlantic and Northeast.  The forecasts were borne out, with Wednesday’s lows falling to the low forties and upper thirties in many cities in these areas.  Maintenance-related or other outages at a number of nuclear-powered generating plants in the Midwest (one each in Illinois, Indiana, Michigan, and Ohio) and the Northeast (Connecticut, New Hampshire, New Jersey, and Pennsylvania) also added some incremental gas demand to replace the lost generation.  Further bolstering prices was the prospect of a late-week cold front moving into the Midwest from Canada.  Prices continued to swing upward yesterday, bringing prices at all Northeast locations above their levels of a week ago.  The New York citygate price ended trading yesterday at $5.52 per MMBtu. 

 

Spot Prices ($ per MMBtu)	Thur.	Fri.	Mon.	Tues.	Wed.
	16-Oct	17-Oct	20-Oct	21-Oct	22-Oct
Henry Hub	4.93	4.57	4.29	4.64	4.88
New York	5.35	4.82	4.68	5.24	5.52
Chicago	5.21	4.75	4.53	4.82	5.03
Cal. Comp. Avg,*	4.88	4.48	4.39	4.53	4.56
Futures ($/MMBtu)
Nov delivery	5.411	5.036	4.772	4.875	4.924
Dec delivery	5.752	5.468	5.148	5.225	5.248
*Avg. of NGI's reported avg. prices for:  Malin, PG&E citygate,
and Southern California Border Avg.
Source: NGI's Daily Gas Price Index (http://intelligencepress.com).

 

Futures prices joined cash prices in a dramatic drop on Friday.  One factor likely contributing to the end-of-week lack of price strength was Thursday’s weekly storage report of a record-tying injection of 81 Bcf for the week ended Friday, October 10.  The near-month contract (for November delivery) fell $0.375 per MMBtu, then fell another $0.264 on Monday (October 20), to settle Monday at $4.772 per MMBtu, its first sub-$5 settlement in 2 weeks.  Monday’s trading marked the 6^th day in a row that futures prices had fallen, but in the past 2 trading days the prompt month has recovered a little over 15 cents per MMBtu, to settle yesterday at $4.924.  The latest two 6-10 day temperature forecasts from the National Weather Service may be lending some support to futures prices, as they are forecasting the probability of below normal temperatures for virtually the entire nation east of the Rockies for the last week in October.

 

Estimated Average Wellhead Prices
	Apr-03	May-03	Jun-03	Jul-03	Aug-03	Sep-03
Price ($ per Mcf)	4.71	4.97	5.35	4.91	4.72	4.58
Price ($ per MMBtu)	4.59	4.84	5.21	4.79	4.60	4.46
Note:  The price data in this table are a pre-release of the average wellhead price that will be published in forthcoming issues of the Natural Gas Monthly.  Prices were converted from $ per Mcf to $ per MMBtu using an average heat content of 1,025 Btu per cubic foot as published in Table A2 of the Annual Energy Review 2001.
Source:  Energy Information Administration, Office of Oil and Gas.

 

Storage:

Working gas inventories reached 3,028 as of Friday, October 17, according to the EIA’s Weekly Natural Gas Storage Report, bringing stock levels above the 5-year (1998-2002) average for the first time since the last week of November of last year. (See Storage Figure).  The reported level is 25 Bcf, or 0.8 percent, greater than the 5-year average, which has now been exceeded in all regions except the East, which is 0.3 percent below its average.  Temperature patterns during the week of this storage report likely contributed to the 10-year record 84 Bcf of implied net injections. (See Temperature Map) (See Deviation Map)  For the United States as a whole, gas-customer weighted heating degree days (HDD) were almost 29 percent less than normal.  More specifically, in Census divisions such as New England, East North Central, and West North Central that might be expected to generate some heating demand in this shoulder month, HDDs ranged from 16 to 39 percent below normal.  Likewise, the East and West South Central divisions, where shoulder-month hot weather is most likely, cooling degree days were 50 and nearly 31 percent less than normal.  The premium in futures prices over the spot price during the report week also provided strong incentive for storage injections.  For example, the settlement price of the near-month contract exceeded the daily Henry Hub spot price by more than 46 cents per MMBtu during the report week. With two weeks remaining in the injection season, working gas stocks are only 23 Bcf below the 5-year average stock level at the start of the heating season of 3,051 Bcf.

 

All Volumes in Bcf	Current Stocks 10/17/03	One-Week Prior Stocks 10/10/03	Implied Net Change from Last Week	Estimated Prior 5-Year (1998-2002) Average	Percent Difference from 5 Year Average
East Region	1,810	1,758	52	1,816	-0.3%
West Region	392	381	11	368	6.5%
Producing Region	826	805	21	819	0.9%
Total Lower 48	3,028	2,944	84	3,003	0.8%
Source:  Energy Information Administration:  Form EIA-912, "Weekly Underground Natural Gas Storage Report," and the Historical Weekly Storage Estimates Database.  Row and column sums may not equal totals due to independent rounding.

 

Other Market Trends:

Revised Methodology for the Weekly Natural Gas Storage Report to be Implemented Next Week: EIA announced that it will revise the estimation system used to produce the Weekly Natural Gas Storage Report (WNGSR). The effective date for the new system is October 30, 2003, when working gas estimates as of October 24 will be released. On October 30, EIA also will release storage estimates based on the new methodology for all weeks from July 4, 2003 to October 17, 2003. The new system expands the sample size, updates the reference period for the estimation parameters to the end of June 2003, and changes the methodology used to estimate the total volume of working gas in storage in each of three regions based on the data in the weekly survey sample. The weekly storage estimates are based on a survey sample that does not include all companies that operate underground storage facilities. The increased sample size will raise the share of total storage volume that is included in the weekly sample. The methodology changes are designed to estimate more accurately the volumes that remain nonsampled. A complete description of the new methodology will be released on October 29, 2003. A summary discussion of the changes is available at http://tonto.eia.doe.gov/oog/info/ngs/methchange.html.

 

Price Volatility: With the start of the heating season on November 1, consumers are particularly interested in the level and variability of natural gas prices.  The term “price volatility” is used to describe price fluctuations of a commodity. Volatility is measured by the day-to-day percentage difference in the price of the commodity.  Volatility provides a measure of price uncertainty in markets. When volatility rises, firms may delay investment and other decisions or increase their risk management activities. The costs associated with such activities tend to increase the costs of supplying and consuming gas.  The natural gas market is subject to significant fluctuations in the level of volatility. Two notable trends exist. First, a degree of seasonality is noticeable within the time series data between January 1995 and September 2003.  Second, the highest volatility levels tend to correlate with the level of natural gas in underground storage. The impact of price volatility varies among consumers based on their overall service needs and purchasing practices.  Prices to residential customers tend to be much more stable than for customers in the other consuming sectors. (See “What Is Price Volatility?” for further discussion of price volatility issues.) 

 

NOAA Issues 2003-04 Winter Outlook:  The National Weather Service (NWS) of the National Oceanic and Atmospheric Administration (NOAA) issued its initial forecast for the heart of the upcoming winter season (December 2003-February 2004) on Thursday, October 16, 2003.  Perhaps of greatest significance for gas markets is that the outlook predicts equal chances for above-, below-, and near-normal temperatures for nearly the entire nation outside of an area encompassing Pacific coast, Southwest, and southern Plains states.  In that geographic band of the West, NWS foresees temperatures likely warmer than long-term averages.  Thus, for many of the high gas-consuming areas of the country, the “equal chances” forecast reflects great uncertainty regarding the prospects for natural gas consumption and prices during the upcoming heating season.  A senior meteorologist in NOAA’s Climate Prediction Center, which is part of the NWS, noted that a major factor in arriving at the “equal chances” forecast is that, unlike in most of the last six winters, this winter season will lack the influence of either a strong El Nino or La Nina.  Absent the effects of these phenomena, forecasters have had to rely on historical temperature and precipitation trends as well as dynamical and statistical models, which unfortunately entail greater uncertainty in seasonal forecasts.

 

Summary:

After falling precipitously early in the week, spot prices recovered much of, and in some cases more than, their losses, as cooler temperatures spread into the Northeast and Middle Atlantic states.  Futures prices experienced similar sharp declines, but a much smaller recovery, thus narrowing the spread between futures and spot prices.  Implied net injections into storage for the week ended October 17 were the largest for the week in EIA’s 10-year span of data, bringing working gas inventories above 3 Tcf with 2 full weeks remaining in the refill season. 

 

 

Natural Gas Summary from the Short-Term Energy Outlook