Overview:  Thursday, December 2 (next release 2:00 p.m. on December 9)

Although temperatures remain generally moderate, December’s arrival has brought some of the coldest temperatures of the current winter and a reminder of the prospect of higher demand as the nation continues into the heating season. This contributed to widespread price increases in spot markets across the Lower 48 States during this week (Wednesday-Wednesday, November 24 to December 1). At the Henry Hub, the spot gas price gained $1.82 per MMBtu on the week to trade at $6.77 yesterday (December 1). In contrast, at the New York Mercantile Exchange (NYMEX), futures prices dropped dramatically. The price of the futures contract for January delivery traded lower on the week by about $1.23 per MMBtu, closing yesterday at $7.413. Natural gas in storage as of Friday, November 26, decreased to 3,299 Bcf, which is 11.2 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil dropped $3.58 per barrel on the week to trade yesterday at $45.56, or $7.86 per MMBtu.

 

 

  

Prices:

After a Thanksgiving week with no trading on Thursday or Friday, cash markets this week adjusted quickly to forecasts of cold weather across much of the country, including key gas-consuming areas. Natural gas spot prices increased $1.19 to $2.17 per MMBtu, with the largest gains coming Monday (November 29). After slipping below $5.00 per MMBtu last week, the Henry Hub price on Monday increased $1.86 per MMBtu, or 38 percent, to $6.81, the highest price at the Henry Hub since early November. In the past two days, the Henry Hub price has fallen 2 cents per MMBtu, resulting in a net gain of $1.82 per MMBtu on the week. Colder weather in the upper Midwest and the Northeast appears to be supporting prices, as price increases at most trading locations in the key gas-consuming regions were well above $1.50 per MMBtu. The price at Chicago citygates increased $1.78 per MMBtu to $7.02, which was a premium of 25 cents to yesterday’s Henry Hub price. The price of spot gas delivered off Transcontinental Gas Pipe Line in New York yesterday averaged $7.43 per MMBtu, an increase of $1.81 on the week.

 

 

At the NYMEX, the price of the futures contract for January delivery at the Henry Hub closed yesterday (December 1) at $7.413 per MMBtu, which is $1.226 lower than last Wednesday’s daily settlement. The near-month contract has fallen in the past three trading sessions. With this week’s trading, the January contract is priced at its lowest level since late September. Several factors appear to be contributing to the generally downward trend that has prevailed since the beginning of November: a general perception of more than adequate gas in storage, lower crude oil prices, and moderate seasonal weather. The 12-month strip, or the average price for contracts over the next year, closed yesterday at just under $6.897, a decline of 66.1 cents on the week.

 

Recent Natural Gas Market Data

 

 

Estimated Average Wellhead Prices
	Jun-04	Jul-04	Aug-04	Sept-04	Oct-04	Nov-04
Price ($ per Mcf)	5.85	5.60	5.36	4.86	5.45	6.07
Price ($ per MMBtu)	5.69	5.45	5.21	4.73	5.30	5.91
Note: Prices were converted from $ per Mcf to $ per MMBtu using an average heat content of 1,027 Btu per cubic foot as published in Table A4 of the Annual Energy Review 2002.
Source:  Energy Information Administration, Office of Oil and Gas.

 

Storage:

Estimated working gas in underground storage was 3,299 Bcf as of November 26, which is 11.2 percent, or 331 Bcf, above the 5-year average inventory level for the report week, according to EIA’s Weekly Natural Gas Storage Report (See Storage Figure). Inventories also were 6.6 percent, or 204 Bcf, higher than the working gas in underground storage for the report week last year. The implied net withdrawal during the week was 5 Bcf, a considerably lower volume than last year’s withdrawal of 59 Bcf. Moderate temperatures throughout the country likely contributed to the relatively small change in inventory levels. The weather for the country as a whole was about 13 percent warmer than normal, as measured by heating degree days (HDDs) for the week ending November 27, according to the National Weather Service.(See Temperature Map) (See Deviations Map) Temperatures in major consuming market areas were generally mild. For example, in the East North Central region, which includes Chicago, HDDs numbered 12 percent below normal.

 

Other Market Trends:

FERC Issues an Order on Commission Monitoring of Price Indices for Natural Gas and Electric Industries: The Federal Energy Regulatory Commission (FERC) issued an order on November 18, 2004, citing steady improvement and increased confidence in published price indices for electricity and natural gas, and listed 10 publishers whose indices may be reliably used as part of Commission-approved tariffs. In early 2003, FERC began examining how price indices reflect and influence wholesale energy prices, trying to improve accuracy, reliability, and transparency of wholesale price indices. In July 2003, FERC issued a policy statement, which set out standards for voluntary reporting of energy transaction data and for developing price indices for natural gas and electricity transactions. In addition to the policy statement, FERC held technical conferences, workshops, conducted two surveys of industry practices in price reporting, and issued behavior rules requiring those who report transaction data to do so in accordance with the standards of the policy statement. According to the new order, FERC will continue to monitor wholesale price formation to make sure there is accurate, reliable and transparent market price information.

 

Japan’s Tepco Reopens Nuclear Reactors: Tokyo Electric Power Company (Tepco), the largest power producer in Japan and the biggest-volume buyer of liquefied natural gas (LNG) in the world, reopened 16 out of 17 nuclear reactors, two years after they were shut down as a result of a scandal over falsified safety reports. Since the closure of the units, Tepco has relied on LNG for substitute power supply.  This incremental demand has affected U.S. imports, the largest market for spot LNG in the world. In the 2003 fiscal year ended March 31, Tepco used 2.55 billion cubic feet (Bcf) per day of LNG for power generation, a 12 percent increase over the pervious year’s 2.27 Bcf per day. The resolution of the two-year crisis in Japan’s nuclear industry likely will result in an increase of the spot LNG available for import to the United States this winter and through 2005.

 

NEB Increases Its Forecast for Canadian Natural Gas Supply:  Canada’s National Energy Board (NEB) is forecasting slightly increased natural gas deliverability through 2006. According to NEB’s Energy Market Assessment, Short-Term Canadian Natural Gas Deliverability 2004-2006, released on November 25, natural gas output will rise from 16.6 Bcf per day in 2003 to 16.9 Bcf per day by 2006. An expected increase in natural gas production from coal methane wells from 0.1 Bcf per day in 2004 to 0.4 Bcf per day in 2006 would contribute to this increase in deliverability.  The report’s forecast is more optimistic than its assessment in 2003, which was based on an expectation that lower gas prices would lead to a less aggressive gas well drilling outlook. In order to offset declines in the productivity of the remaining resources, the Canadian upstream industry will need to continue to increase drilling activity.  The number of wells drilled climbed from 15,100 in 2003 to an estimated 15,600 this year and is expected to climb to 17,900 by 2006. The Western Canadian Sedimentary Basin (WCSB), where almost 98 percent of Canadian natural gas is produced, is expected to remain the main source of Canadian natural gas production through the projection period. 

 

Summary:

Natural gas spot prices at most market locations increased over 30 percent as the peak winter heating season drew closer. The NYMEX price for January delivery at the Henry Hub dropped $1.23 per MMBtu to settle at $7.413 on Wednesday, December 1. Natural gas in storage appears to be more than adequate with volumes about 11.2 percent above the 5-year average as the peak portion of the winter withdrawal season nears. Inventories were an estimated 3,299 Bcf as of November 26, which is a net decrease of 5 Bcf from the previous week.

 

 

 Short-Term Energy Outlook