Friday, December 19, 2008

Natural Gas Production to Grow to 2010

The coldest temperatures of the season to date covered much of the northern half of the country this report week, boosting demand related to space heating on both coasts and across the Northern Plains and Midwest population centers. Prices increased throughout the country outside the Northeast, with the biggest increases occurring for supplies from the Rocky Mountains (particularly for delivery into the Northwest). During the report week, the Henry Hub spot price increased $0.11 per million Btu (MMBtu) to $5.79.

* At the New York Mercantile Exchange (NYMEX), futures prices decreased slightly for the report week as the current economic downturn continued. Expected to accompany this downturn is a likely large-scale reduction in demand for all energy products, which is affecting pricing for energy in forward markets. The futures contract for January 2009 delivery decreased by 6.7 cents per MMBtu on the week to $5.619.

* As of Friday, December 12, working gas in underground storage was 3,167 billion cubic feet (Bcf), which is 3.7 percent above the 5-year (2003-2007) average.

* The price of West Texas Intermediate (WTI) crude oil decreased on the week by $2.93 per barrel to $40.17, or $6.93 per MMBtu. This is the lowest price for WTI crude oil since July 2004.
A major weather front entered the Pacific Northwest, Northern Plains, and Midwest, then moved eastward during the report week, bringing the coldest temperatures of the season to date to much of the Lower 48 States. Increased space-heating demand in consuming regions led to gains in spot-market prices in regions outside the Northeast with prices in the Midcontinent and Rockies producing regions generally increasing by between 15 and 25 percent. Prices for supplies from the Gulf of Mexico region generally advanced less than 5 percent. Along the Gulf Coast in Louisiana and in East Texas, the average increase was $0.08 and $0.23 per MMBtu, respectively, resulting in average regional prices of $5.74 and $5.56. The gains appeared mostly related to short-term weather dynamics, rather than a change in the outlook for longer-term market conditions, with many of the factors leading to a massive decline in prices over the past several months remaining firmly in place. During the week, the current economic downturn continued to suggest a steep decline in demand, particularly in the industrial sector, with many companies announcing layoffs and closures of manufacturing plants around the country.

Natural gas prices now are likely to end the year lower than they were at the beginning, despite having reached historically high levels of more than $13 per MMBtu as recently as the beginning of July 2008. The spot price at the Henry Hub decreased by $7.52 per MMBtu, or 56 percent, since the peak price of $13.31 reached on July 2. The current Henry Hub price of $5.79 per MMBtu is lower than the level at the first of the year by $2.08 or 26 percent. The volatility in natural gas prices over the course of the year reflects the rapidly changing markets for crude oil and energy products. Reduced prices for natural gas in recent months relate to an improved outlook for supplies, particularly because of reported increases in domestic production at unconventional fields such as the prolific Barnett Shale in Northeast Texas. Through the first 9 months of 2008, domestic production increased 7.2 percent in comparison with the same period in 2007, despite some production being shut-in as a result of hurricanes in September, according to the November edition of EIAs Natural Gas Monthly.

During the report week, price increases were largest in the Rockies, where the advent of colder weather has eased concerns over an abundance of regional supplies and limited options for storage. At Rockies trading locations, the average price increased on the week by $1.11 per MMBtu, or 23 percent, to $5.87. For supplies moving westward, weekly gains were particularly strong. The price for supply off Northwest Pipeline Corporation in Washington for delivery into Sumas increased by $4.62 per MMBtu to $10.37. The Sumas market price, which was the highest price in the country yesterday (December 16), likely reflected the extreme weather in Seattle, Washington, this week, as well as competition for supplies with consumers in Canada, where the temperature was well below zero degrees. With this significant weekly increase in Rockies prices, the average price in the region was higher than the Henry Hub price by 8 cents per MMBtu, or 1.4 percent. Rockies spot prices are often the lowest in the country, trading this fall at price levels roughly 40 percent below the Henry Hub price.

Although prices in the Northeast were the highest of all regions, averaging $6.58 per MMBtu, the Northeast was the only region where prices declined over the report week. The decline was limited to an average of 4 cents per MMBtu, or less than 1 percent, as temperatures in the Northeast during this report week were not as extreme as in the middle and western portions of the country. Moreover, while the weather was significantly cold, a large electrical outage in New England may have limited demand for natural gas as a fuel for electric generation. The average Northeast price as of yesterday was 84 cents per MMBtu higher than the average Louisiana price. Although this differential has surged often in the winter when temperatures in the Northeast fall and pipeline capacity into the region becomes congested, the recent relatively moderate temperatures have limited the upward price pressure in this region.

At the NYMEX, the price of the near-month contract (for January delivery) decreased 6.7 cents per MMBtu during the report week to $5.619. The decrease was attributed to expected lower consumption as a result of the current economic downturn, as well as a short-term reprieve from the extreme cold experienced in some parts of the country in recent days. The January contract yesterday finished trading at less than 40 percent of its record high price (of $14.52 per MMBtu) established just 5 months ago, prior to the buildup of concerns over the state of the economy and higher-than-average levels of natural gas in underground storage. Downward price pressure also appears related to an improved domestic production outlook and declines in the crude oil price, which decreased this week to its lowest level in more than 4 years. At the end of trading yesterday, the 12-month strip, which is the average for natural gas futures contracts over the next year, was priced at $6.13 per MMBtu, a decrease of about $0.08, or 1.3 percent, since last Wednesday.


Working gas in storage totaled 3,167 Bcf as of Friday, December 12, 2008, according to EIAs Weekly Natural Gas Storage Report (see Storage Figure). The implied net withdrawal for the week of 124 Bcf is the largest yet this heating season, but slightly less than the 128 Bcf that was withdrawn both last year and on average over the past 5 years. The aggregate level of supplies in underground storage now exceeds the 5-year average by 3.7 percent. Although the current aggregate level is below last years aggregate level by 1.3 percent, storage levels in the West and East regions of the country exceed last years levels by 3.9 and 0.1 percent, respectively. (A description and map of the storage regions are available at Only the volume of storage in the Production region is below the volume last year at this time (by 5.9 percent). Because the Producing region includes more salt-cavern facilities (which allow for greater cycling of injections and withdrawals than reservoirs or aquifers), storage levels in this region may reflect more short-term trading opportunities, rather than preparations to meet space-heating seasonal demand.

This weeks withdrawal from storage reflects a number of market conditions. During the week ending Friday, December 12, significant volumes of natural gas were still shut-in because of damage caused by hurricanes in the fall. During the week ending December 12, an estimated 10.5 Bcf of potential supplies was shut-in in the Federal offshore Gulf of Mexico, possibly requiring industry to withdraw more from storage than they would have otherwise. Another likely factor influencing the size of the withdrawal was colder-than-average weather during the week in all regions east of the Rocky Mountains. As indicated by National Weather Service degree-day data, the number of heating degree-days totaled 9.6 percent above normal for the country as a whole, with regional differences of as much as 21 percent higher than average. In general, the average overall temperature for the week was 35.9 degrees Fahrenheit, about 2.7 degrees below normal see Temperature Maps and Data.

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