Natural Gas

Overview: Thursday, December 8, 2005 (next release 2:00 p.m. on December 15)

Since Wednesday, November 30, natural gas spot prices have increased at all market locations in the Lower 48 States, with increases exceeding $2.50 per MMBtu at most markets. On Wednesday, December 7, prices at the Henry Hub averaged $13.95 per MMBtu, increasing $2.22 per MMBtu, or about 19 percent, since the previous Wednesday. The futures contract for January delivery at the Henry Hub has increased about $1.11 per MMBtu, or about 9 percent on the week (Wednesday-Wednesday), settling at $13.70 per MMBtu yesterday (December 7). Natural gas in storage was 3,166 Bcf as of December 2, which is about 7 percent above the 5-year average. The spot price for West Texas Intermediate (WTI) crude oil increased $1.88 per barrel, or about 3 percent on the week to $59.21 per barrel or $10.21 per MMBtu.

 

 

Prices:

Spot prices increased at all market locations by more than $2 per MMBtu since last Wednesday, November 30, as bitter cold moved into most of the Lower 48 States. The Midcontinent and Texas regions had the largest increases, with prices climbing more than $3 per MMBtu on average. While price spikes in the Northeast region were somewhat less pronounced, averaging about $2.85 per MMBtu, several key market locations, including Transco Zone 6 and the Algonquin citygate, which serve large segments of the region, had price increases of more than $3 per MMBtu. The below normal temperatures moving throughout much of the Lower 48 States doubtlessly contributed to the price spikes as the cold weather has contributed to both heating demand for natural gas and transportation difficulties in the Midwest. For example, El Paso declared a system-wide Strained Operating Condition (SOC) on Wednesday, December 7, owing to declining line-pack on its system. The lingering natural gas production shut-ins in the Gulf of Mexico also contributed to the elevated price level. However, the Minerals Management Service (MMS) reported that shut-in natural gas production fell to 2.5 Bcf per day as of Wednesday, December 7, from its level of 3.0 Bcf per day the previous Wednesday. Cumulative shut-in production since August 6, 2005, reached 514 Bcf as of December 7, which is equivalent to nearly 13 percent of yearly natural gas production in the Gulf of Mexico and more than 10 percent of what total domestic production would have been during this period. Prices at most market locations remain about $6 to $8 above or more than double last year's level at this time. Prices at the Henry Hub on Wednesday, December 7, exceeded last year's level by $7.90 per MMBtu or about 131 percent.

 

 

At the NYMEX, the price of the futures contract for January delivery at the Henry Hub increased about $1.113 per MMBtu or about 9 percent since Wednesday, November 30, to $13.70 per MMBtu. Prices for the other futures contracts through March 2006 increased about 9 percent on average or about $1.11 to $1.26 per MMBtu during the same period. The 12-month futures strip (January 2006 through December 2006) traded at a discount of $2.24 per MMBtu relative to the Henry Hub spot price, averaging $11.71 per MMBtu as of Wednesday, December 7. The futures contract prices for the upcoming heating season months (January 2005 through March 2006) yesterday were 20 cents per MMBtu lower than the Henry Hub spot price on average. The significant discounts relative to the Henry Hub spot price for futures prices throughout the 12-month strip underscore the current tightness of the natural market. Differentials of this magnitude between the spot price and the futures contract prices provide suppliers economic incentives to withdraw gas from storage.

 

Recent Natural Gas Market Data

 

Estimated Average Wellhead Prices
	Jun-05	Jul-05	Aug-05	Sept-05	Oct-05	Nov-05
Price ($ per Mcf)	6.15	6.69	7.68	9.76	10.97	9.54
Price ($ per MMBtu)	5.99	6.51	7.48	9.50	10.68	9.29
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:

Working gas in storage decreased to 3,166 Bcf as of Friday, December 2, 2005, according to EIA's Weekly Natural Gas Storage Report (See Storage Figure). The implied net withdrawal of 59 Bcf leaves storage levels 205 Bcf, or 6.9 percent, above the 5-year average, but 58 Bcf, or 1.8 percent, below the storage level at this time last year. This week's implied net withdrawal is 20 percent below the 5-year average of 74 Bcf, and 22 percent below last year's net withdrawal of 76 Bcf. The below average withdrawal likely resulted from warmer-than-normal temperatures across much of the United States during the report week, especially in major population centers in the East which account for much of the space heating demand (See Temperature Maps). New England and the Middle Atlantic regions experienced temperatures 8 percent and 13 percent warmer-than-normal, respectively, as measured by the National Weather Service heating degree days for the week ending December 1, 2005. Temperatures in the West South Central regions were also about 12 percent above average. During the report week, the NYMEX contract prices for January and February delivery of natural gas held a premium over the Henry Hub spot price ranging up to $1 per MMBtu. This would have limited the net storage withdrawal since such a premium creates economic incentives to favor supplies in the spot market and keep natural gas in storage.

 

 

Other Market Trends:

EIA Releases Report on U.S. Natural Gas Import and Export Activity in 2004: The Energy Information Administration (EIA) has published a report, U.S. Natural Gas Imports and Exports: 2004, that examines natural gas imports and exports in 2004. It focuses on natural gas trade by pipeline to Mexico and Canada, and recent developments in U.S. participation in global LNG trade as well as longer-term trends. U.S international trade of natural gas, including liquefied natural gas (LNG), again exhibited rapidly changing trends in 2004. LNG imports reached historically high volumes that were nearly three times the volume received just 5 years ago. In 2004, after two years of declines, net imports of natural gas and LNG to the United States were 3,404 billion cubic feet (Bcf), which was an increase of 140 Bcf, or 4.3 percent, over the previous year. Growth in the LNG sector of U.S. natural gas supply accounted for the majority of the increase, as the United States imported a record 652 Bcf, 29 percent more than in 2003. U.S. imports by pipeline from Canada reversed a one-year downturn but rose only slightly to 3,607 Bcf, while U.S. pipeline exports to Mexico rose to 397 Bcf, reaching a new record high. The article also discusses the amount of additional LNG import capacity proposed for development during the next several years. A special appendix to this report contains a set of tables with extensive historical data on U.S. natural gas imports and exports. Information in this appendix includes volumes and prices by source country and border crossing.

 

EIA Releases Its December Short-Term Energy Outlook: According to the Energy Information Administration's (EIA) latest Short Term Energy Outlook (STEO), released December 6, the energy price increases in 2005 reflect supply losses owing to hurricanes Katrina and Rita as well as concerns about the reduction in spare world oil capacity. Despite concerns regarding tight supplies and high prices for natural gas and crude oil, total domestic energy demand is projected to increase at an annual rate of about 2 percent in 2006. However, domestic natural gas consumption in 2005 is expected to remain at about the 2004 levels and then increase by 1 percent in 2006, assuming normal weather and the reactivation of damaged industrial plants in the Gulf of Mexico region. Residential natural gas prices are expected to average $12.77 per MMBtu for all of 2005, or about 19 percent higher than last year's price of $10.74 per MMBtu, and increase to about $14.52 per MMBtu in 2006. Domestic dry natural gas production in 2005 is estimated to have declined by 3.8 percent, owing mainly to the hurricane-impacted supply disruptions in the Gulf of Mexico, then increase by 4.8 percent in 2006. On average, households using natural gas are expected to spend about $281 (38 percent) more for fuel this winter than last winter. Expenditures could be significantly higher if actual temperatures are colder than normal. The average costs are highly dependent on weather conditions as well as the size of the homes, the type of heating equipment, and the thermostat setting.

 

Summary:

Natural gas spot prices increased at all market locations in the Lower 48 States since last Wednesday, November 30. Prices for the futures contracts for the upcoming winter months (January through March 2006) traded at a discount to the Henry Hub spot price. Working gas in storage was 3,166 Bcf, which is about 7 percent above the 5-year average.

 

 

Short-Term Energy Outlook