Natural Gas

Overview: Thursday, November 18 (No issue Thanksgiving week; next release 2:00 p.m. on December 2)

Natural gas spot and futures prices fell for a third consecutive week (Wednesday to Wednesday, November 10-17), as temperatures for most of the nation continued to be moderate to seasonal. At the Henry Hub, the spot price declined 6 cents on the week, for the smallest week-on-week decrease in the nation. Spot gas traded there yesterday (Wednesday, November 17) at $6.06 per MMBtu. Price declines at the majority of market locations ranged from around a dime to nearly 60 cents per MMBtu. On the NYMEX, the price for the near-month natural gas futures contract (for December delivery) fell by almost 40 cents on the week, settling yesterday at $7.283 per MMBtu. EIA reported that working gas inventories in underground storage were 3,321 Bcf as of Friday, November 12, which is 9 percent greater than the previous 5-year average. The spot price for West Texas Intermediate (WTI) crude oil declined for a fourth consecutive week, dropping $1.85 per barrel ($0.32 per MMBtu), or nearly 4 percent, from last Wednesday's level, to trade yesterday at $46.85 per barrel ($8.08 per MMBtu).

Prices:

Spot prices declined significantly for the week at all market locations, as generally mild weather coupled with the industry's strong inventory position exerted downward pressure on prices. Price declines were largest in the West and Midcontinent and smallest in Gulf coast production areas and the Northeast. In California, high-inventory operational flow orders of varying length and condition imposed by both PG&E and SOCAL, and reports of high linepack on the Kern River Transmission pipeline, underscored the paucity of swing demand, as night-time temperatures in much of the West continue to be well above normal. The average price for Rocky Mountain locations showed the nation's largest drop for the week, at $0.48 per MMBtu, to an average of $5.25 in yesterday's trading. Spot prices at market locations in West Texas fell an average of 42 cents per MMBtu, to the low $5 range, while California points dropped 36 cents, to $5.62 per MMBtu. Thanks to a significant warming trend beginning over the weekend, prices in the Midcontinent declined from 40 to over 60 cents per MMBtu, and ranged between $5.29 and $5.88 per MMBtu in yesterday's trading. Cooler-than-expected temperatures over the weekend in the Northeast and parts of the Mid-Atlantic contributed to increased demand and boosted prices at Gulf Coast supply locations and in the Northeast region on Monday and Tuesday (November 15-16). This partially offset yesterday's large declines, leaving these market areas with smaller week-on-week decreases, which averaged 15 and 17 cents per MMBtu, respectively. The average spot price for Louisiana market locations was $5.98 per MMBtu yesterday, while spot gas for delivery to New York citygates was $6.59.

On the NYMEX, the December contract settlement price declined $0.395 per MMBtu on the week, or just over 5 percent, as the near-month contract settled yesterday at $7.283. This follows the 12 percent decrease during the previous week. Since becoming the near-month contract on October 28, the December contract has fallen 16 percent in value. The futures contracts for delivery in the remaining heating-season months have shown similar declines over the same period (13 to 15 percent). Nevertheless, the basis spread between the Henry Hub spot price and the settlement prices for these contracts continues to be notably large: about $1.23, $1.91, $1.93, and $1.65, respectively, for the December through March contracts as of yesterday. This continues to provide financial incentive for injections into storage, or for limiting withdrawals from storage in favor of spot-market purchases.

Recent Natural Gas Market Data

Storage:

Natural gas inventories stood at 3,321 Bcf as of Friday, November 12, according to the EIA's Weekly Natural Gas Storage Report. (See Storage Figure) The net stock change from the previous week was an implied net withdrawal of 6 Bcf, marking the first net withdrawal from storage for the two-week-old heating season. Despite the net decrease in stocks, the inventory surplus over the previous 5-year (1999-2003) average for the week increased to 9 percent, as the week's implied net withdrawal fell short of the 5-year average net withdrawal of 15 Bcf. Net withdrawals were recorded only in the East region, partially offset by small injections in the West and Producing regions. Cooler-than-normal temperatures during the week covered by the storage report in the New England and Middle Atlantic Census divisions, as measured by gas-customer weighted heating degree days (HDD), produced a moderate amount of demand in these areas and contributed to the East's net withdrawal. (See Temperature Map) (See Deviations Map) HDDs for these two Census divisions were 24.5 and 17.5 percent, respectively, above normal. Elsewhere, in divisions such as the West North Central, Mountain, and Pacific, HDDs measured 10.7, 13.8, and 2.6 percent, respectively, less than normal. Conversely, parts of West Texas and the Southwest were cooler than normal during the report week, freeing some gas for injections into storage.

Other Market Trends:

New Incentives to Help Boost Production in the Gulf of Mexico: In its first 10-year forecast for oil and gas production in the federal waters of the Gulf of Mexico, the Minerals Management Service (MMS) on November 15^th said that it expects a 13-percent increase in natural gas production over the next decade. Oil production over the same timeframe will increase by approximately 43 percent, according to the agency. MMS attributed the production increase to new incentives encouraging energy companies to explore and develop difficult-to-reach areas of the Gulf of Mexico. There have been incentive programs for deep-water areas since 2001, and more recent incentives offer developers royalty relief to tap into pockets of natural gas deep under shallow waters in the Gulf. Energy companies are responding positively to the new incentives, according to MMS. By 2011, most oil production in the Gulf likely will come from deep-water wells, while natural gas will come from both the deep-water and shallow-water areas. This is the ninth year of expansion of the deep-water frontier in the Gulf, and this trend is expected to continue over the next 10 years. More than 100 development projects have begun production and new discoveries that have occurred in the past three years are expected to be developed. Natural gas production is expected to increase to 13 billion cubic feet (Bcf) per day by 2011 from current levels of about 12 Bcf per day. However, in the short term, there will be a decline in natural gas production, as old fields begin to be exhausted. This year's production estimate by MMS is based on a new methodology, which analyzes recent deep-water discoveries and projected deep-water reserves in addition to surveying oil and gas companies.

Summary:

Spot and futures prices continued on a downward trend for the third consecutive week, as the lack of significant heating demand and high inventory levels exerted downward price pressure. The basis spreads of futures prices over the Henry Hub spot price continued to be relatively large. EIA reported the first implied net withdrawal of the heating season, as of the week ended Friday, November 12.

Short-Term Energy Outlook