Natural Gas Weekly Update

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Prices

Since last Wednesday, July 21, natural gas spot prices were mixed at market locations across the lower 48 States, with most prices trading within about $0.20 of week-ago levels. Natural gas prices fell at the majority of market locations since last Wednesday, while a significant number of market locations posted gains on the week. Price declines were generally located in the western and eastern regions of the lower 48 States, including California, Arizona/Nevada, the Rocky Mountains, and Midcontinent regions in the west, while the northeast and Florida regions posted declines in the east. These declines were likely the result of warm temperatures easing somewhat in these regions during the report week. Price increases generally occurred in the central areas of the lower 48 States, including the Midwest and most of the markets near the producing areas of the Gulf of Mexico. At the Henry Hub, prices rose about $0.05, or about 1 percent, since last Wednesday.

Prices at the Florida Gas Transmission (FGT) Citygate trading point remain the highest in the lower 48 States.  Despite posting a 14-cent decline on the week, prices at the FGT Citygate averaged $7.86 per MMBtu, exceeding the next-highest market location by $2.61 per MMBtu. Prices at the Florida Citygate have been the highest in the lower 48 States since an early heat wave in the first week of May. At $7.86 per MMBtu, prices at the Florida Citygate are $3.81, or 94 percent, above year-ago levels. Warm temperatures in Florida likely contributed to increased cooling demand for natural gas, resulting in relatively high prices in the State.

Natural gas spot prices at the Henry Hub are trading significantly above year-ago levels. TAt $4.75 per MMBtu in trading on July 28, prices at the Henry Hub were nearly 36 percent, or $1.26 per MMBtu, higher than year-ago levels. Natural gas spot prices at most markets elsewhere in the lower 48 States were trading at about 15 to 41 percent above year-ago levels. Higher spot prices likely reflect increased natural gas consumption for electric power generation, recovery in the industrial sector, and increases in crude oil prices since last year. In trading on July 28, the WTI crude oil price exceeded last year's level of $63.42 per barrel, or $10.93 per MMBtu, by nearly 22 percent.

Natural gas consumption in the lower 48 States fell since last week, but remains significantly above year-ago levels. Natural gas consumption during the report week fell from week-ago levels, with declines in each of the consumption sectors, excluding the industrial sector, according to BENTEK Energy Services, LLC. Moderating temperatures likely contributed to lower natural gas consumption during the report week. An increase of 1.2 percent in the industrial sector partially offset a decline of 0.9 percent in the electric power sector, resulting in an overall decrease of 0.6 percent in total natural gas consumption on the week. Despite this week's decline, natural gas consumption in the electric power and industrial sectors exceeds year-ago levels by 20.5 percent and 7.8 percent, respectively.

Natural gas supplies declined since last week as a result of decreases in production, Canadian imports, and sendout of liquefied natural gas (LNG). On the week, natural gas supplies fell by 1.7 percent, according to BENTEK estimates. Natural gas production shut-ins in the Gulf of Mexico resulting from the threat of then-Tropical Storm Bonnie contributed to the roughly 1-percent decline in production on the week. These production shut-ins in the Gulf totaled about 5 Bcf from July 23 through July 27. However, natural gas production recovered as the week progressed and as the shut-ins ended. By Wednesday, July 28, domestic natural gas production had climbed about 0.9 percent above the previous Wednesday's level. Canadian imports decreased an estimated 2.4 percent on the week, while LNG sendout fell by about 15 percent. Despite these declines, current U.S. natural gas production remains about 1.2 percent above last year's level at this time.

At the NYMEX, the 12-month strip (or the average price of futures contracts from August 2010 through July 2011) averaged $5.00 per MMBtu in trading on Wednesday, July 28, rising by about $0.07 on the week.  Most of the weekly gains in the 12-month strip occurred for the front months, with the contract for August 2010 delivery posting the largest gain of $0.26 per MMBtu on the week. Each successive contract recorded progressively smaller increases on the week, with the prices of contracts following March 2011 posting declines. Natural gas futures prices for delivery during the remaining injection season months (August through October 2010) averaged $4.75 per MMBtu, increasing by an average of about $0.22 since last Wednesday. Meanwhile, prices for delivery during the heating season (November 2010 through March 2011) averaged $5.15 per MMBtu, increasing $0.04 on the week. The 12-month strip traded at a premium of $0.25 to the Henry Hub spot price. This premium suggests the incentive for natural gas suppliers to replenish inventory levels of natural gas held in storage continues. The contract for August delivery expired in trading at $4.774 per MMBtu, climbing $0.06 during its tenure as the prompt-month contract.

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Storage

Working natural gas in storage increased to 2,919 Bcf as of Friday, July 23, according to EIA's Weekly Natural Gas Storage Report (see Storage Figure). The implied net injection was 28 Bcf, compared with last year's net injection of 70 Bcf and the 5-year (2005-2009) average injection of 50 Bcf for the report week. Increases in natural gas consumption attributable to relatively warm temperatures in most regions of the lower 48 States likely contributed to the below-normal rate of injections into storage. As a result, the year-on-year storage deficit increased considerably, from 52 Bcf to 94 Bcf below last year's level. Working gas inventories were 239 Bcf above the 5-year average level, marking the sixth consecutive week that this surplus has declined. Working gas in storage exceeded the 5-year average for this time of year in each of the three storage regions, with the Producing region recording the largest surplus relative to the 5-year average of 126 Bcf. Inventories in the East and West regions exceeded the 5-year average by 25 Bcf and 88 Bcf, respectively. However, working gas stocks in the East region are 56 Bcf, or 4 percent, below last year's level.

Working gas stocks declined in the Producing and West regions during the report week. These declines mark only the third time in the 18-year history of the weekly series that both regions posted net declines during July, with the other two instances occurring in 2006. Overall, the West region has recorded withdrawals during July six times in the 18-year history of the series, and the Producing region has done so only three times. The increasing frequency of withdrawals from natural gas storage in the Producing region since 2006 has resulted from the increased prevalence of salt dome storage in the region during the period.

Temperatures were generally warmer than normal in most Census Divisions in the lower 48 States during the week ended July 22.  Based on the National Weather Service's degree-day data, temperatures in the lower 48 States during the week ending July 22 were, on average, about 3.4 degrees warmer than normal and 5.3 degrees warmer than last year (see Temperature Maps and Data). Temperatures were warmest in the West South Central, South Atlantic, and East South Central Census Divisions, where average temperatures ranged between 82 and 84 degrees. Elsewhere in the lower 48 States, average temperatures ranged between 71 and 76 degrees. Temperatures were generally about 3 to 5 percent above normal in most Census Divisions.

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 Other Market Trends

Natural Gas Rig Count Rises by Three, while Horizontal Rig Count Decreases Despite Year-Long Gains.  According to Baker Hughes Incorporated data released on July 23, the natural gas rotary rig count increased by 3 from the prior week to 982. Since June 25, the natural gas rig count has risen by 23, with a relatively large week-over-week increase of 15 for the week ended July 16. The number of active natural gas rigs in the Gulf of Mexico also increased by two as of July 23 compared with week-ago levels. This increase may be attributable to the U.S. Department of Interior (DOI) resuming the issuance of shallow water drilling permits in late July. New drilling safety regulations DOI implemented in June had been hindering the permitting process. Currently, 9 natural gas rigs are active in the Gulf of Mexico, compared with 42 active rigs 1 year ago and 22 active rigs at the beginning of 2010. According to Baker Hughes data, the horizontal rig count (including both oil and gas) registered a week-over-week decrease of 1, while the vertical and directional rig counts (also including both oil and gas) increased by 4 and 11, respectively. Despite the pause this week, the horizontal rig count has increased substantially: at 858 as of July 23, the horizontal rig count is more than twice its year-ago level. The directional and vertical rig counts have also increased over the past year, but remain far below their record levels seen in 2006.

Explosion at Pennsylvania Well Site Kills Two Workers. On July 23, an oil storage tank exploded at a shallow oil well site in Indiana Township, Pennsylvania, killing two subcontractor employees who were performing routine maintenance. The owner of the well, Huntley & Huntley, Inc., stated in a company press release that the cause of the explosion remains unknown. According to the company, the well also produced some natural gas. Although the Pennsylvania Department of Environmental Protection (PADEP) has not released an official statement regarding the incident, PADEP spokesman Tom Rathbun said that the agency hopes to complete an investigation within 45 days. The two workers who were killed were employees of Northeast Energy Management Inc. More information regarding the explosion is available on Huntley & Huntley's website.

Government and Industry Continue to Respond to Oil Spill in the Gulf of Mexico. 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:

• On July 12, BP completed the installation of a new sealing cap on the blownout well. Subsequently, BP suspended subsea containment system operations, effectively sealing the leaking well and enabling well integrity tests to begin July 15. No oil is expected to be released from the well during testing.
• Also on July 15, BP suspended drilling activities associated with its second relief well, which began May 16, to prevent interference with work on the first relief well. The connection of both relief wells to the blown-out well is considered the most effective means of permanently sealing and isolating the well.
• With the guidance and approval of the Deepwater Horizon Unified Command, BP suspended drilling activities associated with its first relief well on July 23 because of the potentially adverse weather conditions attributable to then-Tropical Storm Bonnie. Although BP returned its drilling rig to the relief well site on July 24, drilling operations have not yet resumed. In a July 27 press conference, BP Senior Vice President for Exploration and Production Kent Wells estimated that the intersection of the first relief well and the blownout well could be complete by August 11.
• According to the U.S. Department of Interior (DOI), more than 34.8 million gallons of oil-water mix have been recovered and 11.1 million gallons of oil have been removed from the open water using controlled burns as of July 25. According to BP, its containment systems have collected or flared 34.7 million gallons of oil at the wellhead as of July 19.
• DOI also reports that as of July 25, 637 miles of shoreline in Louisiana, Mississippi, Alabama, and Florida is currently oiled, while 24 percent of Gulf of Mexico Federal waters remain closed to fishing.

More information about the oil spill, as well as the Government's ongoing response, is available at http://www.deepwaterhorizonresponse.com.

 Natural Gas Transportation Update

• Energy Transfer Partners, LP, on Wednesday, July 28, reported that its Oasis Pipeline experienced a rupture near Sealy in Austin County, Texas. Energy Transfer said that although no fire or injuries resulted from the incident, the company would immediately shut down the 36-inch-diameter pipeline segment. As no natural gas is flowing through the section of the pipeline, shippers are rerouting supplies. Investigations are currently underway and the duration of repairs to the pipeline remains unknown.
• Colorado Interstate Gas (CIG) Company on July 23 experienced an engine turbocharger failure at its compressor station in East Laramie, Wyoming. Effective Saturday, July 25, the pipeline company will reduce the capacity of the compressor station from 770 million cubic feet (MMcf) per day to 680 MMcf per day until further notice. Interruptions to service are possible because capacity at the station is currently fully subscribed at 770 MMcf per day, according to CIG.
• Millennium Pipeline Company LLC this week said maintenance at its compressor station in Corning, New York, would continue through July 31. The maintenance may affect receipts from Empire Pipeline and National Fuel Gas Pipeline.
• Gulf South Pipeline Company LP on July 26 announced plans for maintenance at a compressor station in Montpelier, Louisiana. The pipeline company said that the planned maintenance would start August 9 and likely last 5 days. The maintenance may reduce station capacity by 50 MMcf per day. The station's capacity under normal conditions is about 700 MMcf per day.

See Weekly Natural Gas Storage Report for additional Natural Gas Storage Data. See Natural Gas Analysis for additional Natural Gas Reports and Articles. See Short-Term Energy Outlook for additional Natural Gas Prices, Supply, and Demand.