Natural Gas Weekly Update

Overview (For the Week Ending Wednesday, May 26, 2010)

Current production during this report week remained relatively high, adding to a perception of a strong supply outlook. Natural gas prices drifted lower at markets across the lower 48 States during the report week. The Henry Hub spot price ended trading yesterday, May 26, at $4.19 per million Btu (MMBtu), a decrease of $0.09 compared with the previous Wednesday.
At the New York Mercantile Exchange (NYMEX), the futures contract for June delivery at the Henry Hub closed at $4.16 per MMBtu yesterday, which was its last day of trading as the near-month contract. This price was unchanged for the report week. Nonetheless, the final price of the June contract is about $0.12 per MMBtu lower than the previous month's (May) contract price at expiration.
As of Friday, May 21, working gas in underground storage was 2,269 billion cubic feet (Bcf), which is 16.3 percent above the 5-year (2005-2009) average. The implied net injection into storage was 104 Bcf.
The spot price of West Texas Intermediate (WTI) crude oil increased on the week by $1.61 to $71.52 per barrel, or $12.33 per MMBtu. During the report week, the spot price of WTI crude oil fluctuated significantly. In fact, on Tuesday, May 25, the spot price reached a 10-month low, averaging $64.78 per barrel.

NYMEX Natural Gas Futures Near-Month Contract Settlement Price, West Texas Intermediate Crude Oil Spot Price, and Henry Hub Natural Gas Spot Price Graph

Prices

Although price declines were mostly moderate during the report week, they occurred throughout the country. On Wednesday, May 26, the Henry Hub natural gas spot price averaged $4.19 per MMBtu, which was 9 cents less than the average price the previous Wednesday. Price decreases across the country ranged between $0.03 and $0.29 per MMBtu, which on average represented percentage decreases of about 2 percent. With the exception of the spot price for delivery to Florida (which declined 5.8 percent), the largest percentage declines occurred in the Rocky Mountains and California. In these regions, price decreases were as high as 4 percent, in part owing to reports of high linepack (inventory on pipelines) at the Pacific Gas and Electric Citygate in Northern California, as well as Southern California Gas. The price at the Opal, Wyoming, trading point decreased $0.11 on the week to $3.77 per MMBtu. Trading locations in the Northeast posted much more moderate declines on the week. For delivery in Zone 6 into New York off the Transcontinental Gas Pipeline, the price yesterday was $4.64 per MMBtu, a decline of just $0.03 on the week.

Strong domestic production this week continued putting downward pressure on prices, which is likely contributing to lower imports of natural gas. Contrary to expectations of production declines because of a reduction in drilling activity last year, domestic marketed production remains strong at over 60 Bcf per day, according to estimates from BENTEK Energy Services, LLC. In particular, production increases have been recorded from unconventional gas fields such as the Marcellus Shale in the Northeast/Appalachia region and Haynesville Shale in Louisiana. Overall supply levels during the report week were about 2.9 percent higher than last year, according to BENTEK estimates. According to the May Short-Term Energy Outlook (STEO), marketed production this month is expected to reach 60.6 Bcf per day (lower 48 States only), a forecast that is about 5.9 percent higher than the projection in the January 2010 STEO. As a result of strong domestic production and lower prices, a trend of lower imports of natural gas is developing. During the report week, sendout from U.S. LNG import terminals averaged about 1.3 Bcf per day, about 12 percent lower than the comparable week last year. The level of LNG sendout from U.S terminals is also significantly lower than the 2.0 Bcf per day during the first 2 months of the year.

During the report week, moderately high demand for this time of year likely contributed to limiting price declines at market locations across the lower 48 States. Total U.S. demand ended the report week at about 55.3 Bcf per day, but dropped below 50 Bcf per day earlier in the week, according to estimates from BENTEK. At these levels, demand was well below the average available supply, which suggests opportunities for injections into storage (see Storage below). According to BENTEK, overall demand on the week was 0.7 percent higher than the previous report week, and 12 percent higher than the similar week last year. With temperatures above 90 degrees reported in parts of the South, as well as the Northeast and Midwest, natural gas demand rose in the electric power sector, which experiences its highest load factor during heat waves as air-conditioning demand increases. According to BENTEK estimates, natural gas demand in the power sector averaged about 21.3 Bcf per day during the report week, which was 13 percent higher than the preceding week, and about 28 percent higher than the comparable week in 2009.

At the NYMEX, the price of the near-month contract (for June delivery) was unchanged during the report week, finishing trading yesterday at $4.16 per MMBtu. It was the last day of trading for the June contract, which during its term as the near-term contract increased in value by about 17 cents per MMBtu. Nonetheless, its final price is lower than the final price of the May contract, which expired at $4.27. The lower price appears related to a strong domestic production outlook. The July 2010 contract is currently priced about 23 percent higher than the expiration price of $3.95 per MMBtu for the July 2009 contract. 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 $4.77 per MMBtu, a decrease of about $0.06, or 1.3 percent, since last Wednesday.

More Price Data

Storage

Working natural gas in storage increased to 2,269 Bcf as of Friday, May 21, according to EIA's Weekly Natural Gas Storage Report (see Storage Figure). The implied net injection was 104 Bcf, compared with last year's net injection of 106 Bcf and the 5-year average of 94 Bcf for the report week. Working gas inventories are currently 71 Bcf above year-ago levels and 318 Bcf above the 5-year average level. For the last 10 weeks, working gas in storage has exceeded the 5-year average for this time of year. Working gas stocks remain above the then-record levels established in 2009 for this time of year.

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Temperatures were generally mild in most Census Divisions in the lower 48 States during the week ended May 20. Based on the National Weather Service's degree-day data, temperatures in the lower 48 States during the week ending May 20 were, on average, about 0.3 degrees warmer than normal and 0.1 degrees cooler than last year (see Temperature Maps and Data). Temperatures in the New England and Middle Atlantic Census Divisions (which constitute the majority of the East storage region), as well as the South Atlantic, East South Central, and West South Central Census Divisions, were warmer than normal, ranging between 0.3 and 2.6 degrees above normal for this time of year. In the East North Central, West North Central, Mountain, and Pacific Census Divisions, average temperatures ranged between 57 and 67 degrees, and were as much as 2.4 degrees below normal. Relatively mild temperatures likely contributed to the pace of storage injections during the report week.

More Storage Data

Other Market Trends

"Top Kill" operation stabilizes, stops flow of oil from well in the Gulf of Mexico, as operation continues, according to U.S. Coast Guard Official. On Thursday, May 27, Coast Guard Admiral Thad Allen said that the top kill operation has "stabilized the wellhead," halting the flow of oil and gas, according to numerous media sources. Adm. Allen stopped short of declaring the effort, which BP undertook on Wednesday, May 26, a success, indicating that more work has to be done to seal the well. If successful, the operation will pump enough mud into the well bore to ensure that there is no pressure being exerted back by the hydrocarbons, allowing a cement plug to be put in place, according to Adm. Allen. This is the first time this procedure has been conducted at 5,000 feet water depth.

Deepwater Horizon Oil Spill Response Efforts Ongoing. Response continues to the oil spill following the April 20 explosion aboard the Deepwater Horizon mobile offshore drilling unit. The rig was located about 50 miles southeast of Venice, Louisiana. Some of the latest facts (according to status reports from the Administration-wide response, unless where otherwise noted) include:

BP continues to drill two relief wells: One is 10,000 feet deep thus far; the other is more than 8,500 feet deep.
Commerce Secretary Gary Locke determined that the economic impact on commercial and recreational fisheries has led to a fishery disaster in the Gulf of Mexico. Affected States include Louisiana, Mississippi, and Alabama. The disaster classification allows the Federal Government to fully mobilize assistance to fishing communities.
President Obama tapped Energy Secretary Steven Chu to lead a group of experts from both inside and outside the Federal Government to examine possible solutions to the oil spill and to provide scientific and technological support in the effort. Among a number of other contributions, experts from the Department of Energy's National Laboratories have provided diagnostics of failed blowout prevention equipment, as well as structural analysis of the failed riser.
Energy production in the Gulf of Mexico has not been significantly affected to date, according to the May 19 edition of EIA's This Week in Petroleum (TWIP). However, according to TWIP, some effects may have yet to be seen. For example, in areas where oil is the most concentrated, shipping, production, or drilling operations could be suspended as a result of air quality or fire hazard.

More information about the Administration's ongoing efforts to respond to the oil spill is available here: http://www.deepwaterhorizonresponse.com/go/site/2931/. Additionally, EIA has released a Gulf of Mexico fact sheet, updated May 20, which includes a map of the area and some of the most requested data series regarding oil, natural gas, and liquid fuels.

NOAA Predicts a Very Active 2010 Atlantic Hurricane Season. The National Oceanic and Atmospheric Administration (NOAA) released an updated 2010 Atlantic Hurricane Season Outlook today, May 27, which calls for an 85-percent chance of an above normal season. The Atlantic Hurricane Region includes the North Atlantic Ocean, the Caribbean Sea, and the Gulf of Mexico. NOAA estimates a 70-percent chance that there will be 14-23 named storms, 8-14 hurricanes, and 3-7 major hurricanes. The latest outlook reflects an expected set of conditions that is very conducive to increased hurricane activity, including exceptionally warm sea surface temperatures in the tropical Atlantic Ocean and Caribbean Sea and either El Niño Southern Oscillation neutral or La Niña conditions in the tropical Pacific, with La Niña becoming increasingly likely. The El Niño episode, which contributed to the below normal Atlantic hurricane season last year, has dissipated. In addition, dynamic model forecasts of the number and strength of tropical cyclones also predict a very active season. According to NOAA, if the 2010 activity reaches the upper end of its predicted ranges, it will be one of the most active seasons on record.

EIA Projects Robust Growth in Unconventional Production and Demand for Natural Gas. EIA on May 25 released a preliminary version of the International Energy Outlook (IEO), which includes projections from 2007 through 2035. The IEO bases its projections on a reference case that assumes current laws and policies remain unchanged through the forecast period. Some highlights from the IEO include:

The IEO projects overall natural gas production to increase substantially from 2007 through 2035, with nonmember countries of the Organization for Economic Cooperation and Development (OECD) accounting for the largest increases.
Natural gas production in the Middle East is expected to grow by 16 trillion cubic feet (Tcf) over the projection period and the worldwide production is expected to grow by 48.8 Tcf.
Worldwide natural gas consumption is projected to increase by 44 percent, from 108 Tcf in 2007 to 156 Tcf in 2035.
Non-OECD countries are projected to also account for the most rapid growth in energy demand from 2007 to 2035.
Additionally, the industrial sector, which remains the largest end-user of natural gas despite lagging demand as a result of the global economic downturn in 2009, is projected to account for 39 percent of consumption in 2035.
LNG liquefaction capacity is projected to increase from about 8 Tcf in 2007 to 19 Tcf in 2035.

Natural Gas Rigs Jump Following 2 Weeks of Decline. The natural gas rotary rig count totaled 969 as of May 21, 2010, according to Baker Hughes Incorporated. This level represents an increase of 18 from the previous week, following 2 consecutive weeks of relatively small declines in the natural gas rig count. Year to date, the rig count has increased 28 percent. Despite recent declines, rigs have generally shown an increasing trend since the beginning of the year. According to data that Baker Hughes released earlier this month, rig growth in shale formations has helped to offset a decline in vertical rigs over roughly the past 2½ years, buoying growth in natural gas rigs.

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