Overview

* Natural gas spot price movements were mixed this report week (Wednesday–Wednesday, May 21-28), with price decreases generally occurring in markets west of the Mississippi River and price increases dominant in trading locations in the eastern parts of the country. During the report week, the Henry Hub spot price increased $0.20 per million Btu (MMBtu) to $11.60.

* At the New York Mercantile Exchange (NYMEX), futures prices increased for the report week, continuing a trend of rising prices that has occurred in futures markets for many commodities this spring, including futures prices for crude oil. The futures contract for June delivery, for which the final day of trading was yesterday (May 28), increased 27.6 cents per MMBtu on the week to $11.916.

* During the week ending Friday, May 23, estimated net injections of natural gas into underground storage totaled 87 billion cubic feet (Bcf). Working gas in underground storage as of May 23 was 1,701 Bcf, which is 0.5 percent below the 5-year (2003-2007) average.

* West Texas Intermediate (WTI) crude oil continued to trade at record-high price levels of more than $130 per barrel. However, a sharp decrease of more than $2 per barrel on Tuesday, May 27, resulted in a net decline of $1.99 in the crude oil price during the report week. The WTI average yesterday was $131.00 per barrel, or $22.59 per MMBtu.

Prices

Natural gas continued to trade at elevated prices at trading locations throughout the Lower 48 States this report week, with prices at most markets exceeding $10 per MMBtu. Current prices in all parts of country exceed historical records for this time of year, when moderate temperatures lead to significantly lower aggregate demand and result in additional supplies injected into storage for later in the year. However, natural gas prices this year have followed the rising trend that has occurred for many commodities, including petroleum products. Since the beginning of 2008, the spot price at the Henry Hub has increased $3.77 per MMBtu, or 48 percent, to yesterday’s average of $11.60. The net change for the report week at the Henry Hub was an increase of 20 cents per MMBtu, while other spot markets along the Gulf Coast in Louisiana and East Texas registered regional price increases of $0.11 and $0.22 per MMBtu, respectively. The resulting average regional prices of $11.46 per MMBtu in Louisiana and $11.39 in East Texas yesterday established new record highs for this time of year.

Elevated natural gas spot prices also reflect recent supply conditions specific to the natural gas market. Production associated with the Independence Hub in the offshore Gulf of Mexico remains shut-in for the 49th consecutive day, which has removed about 900 million cubic feet (MMcf) per day of supplies from the natural gas market. Enterprise Products Partners reports that repairs are expected to be completed in the first half of June. Although supplies of liquefied natural gas (LNG) imports have increased to their highest level of 2008, the pace of deliveries remains considerably below last year’s volumes. LNG imports in May have averaged about 1.1 Bcf per day (based on send-out data from LNG import terminals), which is significantly less than the average of 2.9 Bcf per day in May 2007. Most LNG cargoes are heading to Europe and Asia, where buyers continue to purchase LNG at higher prices than those that have prevailed in U.S. markets.

Although the weather was moderate across the country (relative to the peak demand seasons), cooler-than-normal night-time temperatures in the Great Lakes region and rising temperatures in the South likely supported price increases in the eastern United States during the report week. The average price in the Northeast region yesterday was $12.16 per MMBtu, which was 9 cents higher than the previous Wednesday. This marked the fifth consecutive day of prices averaging over $12 in the region, which has experienced the highest prices in the country, in part owing to higher pipeline transportation costs. For the week, the average spot price for delivery in New York off Transcontinental Gas Pipe Line (Transco Zone 6-NY) increased $0.06 per MMBtu to $12.21, a premium of $0.81 per MMBtu to the price at the Henry Hub.

In contrast to the slightly higher prices in the East, prices in markets west of the Mississippi River decreased as temperatures cooled significantly in California and the Southwest after a heat wave moved through the region last week. The result was lower demand for natural gas as a fuel for power generators meeting air-conditioning needs in the region. In the Rockies market region, the average price yesterday was $9.12 per MMBtu, the lowest average regional price in the Lower 48 States and a decline of 48 cents on the week. During the week, there was substantial price volatility as several pipelines restricted flows because of high linepack. The price at the Bondad pool in the San Juan Basin decreased $0.94 per MMBtu on the week to $8.90 in trading yesterday, as El Paso Natural Gas Pipeline Company announced high-inventory conditions.

Futures prices increased at the NYMEX for the report week, continuing an upward trend since the beginning of the year. The price of the near-month contract (for June delivery) increased in 3 of the 4 trading days during the week for a net increase of 27.6 cents per MMBtu, finishing the report week at $11.916 per MMBtu. Wednesday, May 28, marked the final day of trading for the June 2008 contract. The expiration price was the highest recorded at the NYMEX since the November 2005 contract (in the aftermath of the hurricane season in which Hurricanes Katrina and Rita substantially limited Gulf of Mexico supplies). The expiration price is a historical record high for a June delivery contract on the NYMEX and about $4.33 per MMBtu higher than the expiry price of $7.591 for the June 2007 contract price.

Recent high prices extend throughout the forward curve, suggesting prices are expected to remain elevated through at least the next winter heating season. Prices for delivery during the summer months of July and August are priced, respectively, 7.9 and 16.3 cents higher than the June contract, reflecting expected higher natural gas demand to fuel power generation for air-conditioning needs. At the same time, as occurs every year, the natural gas industry will be injecting supplies into storage for next winter. At the end of trading yesterday, the 12-month strip, which is the average for futures contracts over the next 12 months, was priced at $12.12 per MMBtu, an increase of about 15 cents since last Wednesday. Beginning with the June 2008 contract, futures prices increase steadily through the beginning of 2009. The highest-priced contract in the futures strip is the January 2009 contract, which closed at $12.987 per MMBtu on May 28.

Storage

Working gas in storage increased to 1,701 Bcf as of Friday, May 23, 2008, according to EIA’s Weekly Natural Gas Storage Report (see Storage Figure). This report week’s implied net injection of 87 Bcf is lower than both the 5-year average injection of 92 Bcf and last year’s injection of 106 Bcf. As a result, storage activity during the report week increased the difference between current inventories and the 5-year average level from 3 Bcf below average to 8 Bcf below. Further, the deficit between current inventories and levels last year at this time increased from 302 Bcf to 321 Bcf. In general, injection activity this week continued to follow both last year’s activity and the trend suggested in the average over the past 5 years during the spring (see relative Other Market Trend below).

The slightly-below-average net injection came during a week when cooler-than-normal temperatures in the Northeast and warmer-than-normal temperatures in the West likely generated weather-related demand (for space-heating in the North and by power-generators for air-conditioning needs in the West). As indicated by National Weather Service degree-day data overall temperatures were less than 1 degree below normal. However, temperatures were at least 5 degrees below normal in the Middle Atlantic and East North Central Census Divisions (see Temperature Maps and Data).

Other Market Trends

Status of Natural Gas in Storage. The adequacy of any level of gas in storage is difficult to estimate and depends on many factors, including available supplies from domestic and foreign sources, conditions in other fuel markets such as petroleum products, and the timing and severity of weather. As of May 23, working gas in storage was 1,701 Bcf. This was 321 Bcf below last year’s level and 8 Bcf below the 5-year average. Net injections so far this refill season (April-November) are about the same as the 5-year average and last year’s refill. An average rate of weekly net injections from May 23 through the remainder of the refill season would result in an estimated 3,319 Bcf of working gas in storage by November 1, which is only 10 Bcf below the 5-year (2003-2007) average of 3,329 Bcf. However, even without any significant supply interruptions, it likely would be difficult to match the level reached at the beginning of last year’s heating season. Reaching last year’s level of 3,657 Bcf would require 1,956 Bcf to be injected between May 23 and the end of the refill season, which is slightly lower than the amount added to storage during the entire 2007 refill season (see figure, Storage Net Refills and End-of-Heating Season Stocks). One factor contributing to the relatively low level of working gas so far this season is the low storage inventory at the end of the past heating season (March 31). The current storage refill season started with approximately 1,242 Bcf of natural gas in storage (based on Weekly Natural Gas Storage Report data), which was lower than both the 5-year average level of 1,273 Bcf and last year’s volume of 1,603 Bcf. The May 2008 Short-Term Energy Outlook predicts that 3,358 Bcf of working gas will be in storage at the onset of the 2008-2009 heating season.

Storage Net Refills and End-of-Heating Season Stocks

NOAA Predicts a Near Normal or Above Normal 2008 Hurricane Season: The National Oceanic and Atmospheric Administration (NOAA) has released its 2008 hurricane season forecast for the Atlantic region. According to the forecast, there is a 90-percent chance of a near or above normal hurricane season this year.. NOAA is predicting a 60- to 70-percent chance of 12 to 16 named storms in the Atlantic region, compared with 14 named storms last year. Of the named storms, 6 to 9 are expected to become hurricanes and 2 to 5 are expected to become major hurricanes, compared with last year, when 6 of the storms became hurricanes, 2 of which became major hurricanes of Category 3 strength or higher. During an average season, there are about 11 named storms. Factors contributing to this year’s hurricane outlook are the continuing multi-decadal signal (the combination of ocean and atmospheric conditions that have spawned increased hurricane activity since 1995) and the anticipated lingering effects of La Niña. The hurricane season begins in June and lasts until late November. Regardless of the forecast, NOAA is stressing preparedness and announced that May 25-31 is National Hurricane Preparedness Week.
Natural Gas Transportation Update

* Pacific Gas and Electric Company (PG&E) announced on May 23 that as a result of over deliveries earlier in the week on California Gas Transmission Pipeline’s Baja Path located in California, the system is experiencing high inventory. The Baja Path was constrained by 60 thousand cubic feet on May 23 and May 24. While the company managed to avoid firm service level cuts, firm supplies coming into PG&E's system on the Baja Path were affected by these constraints.

* Panhandle Eastern Pipe Line Company announced that as of May 29, there will be an outage on the Houstonia 400 line in Texas from the Houstonia station to gate valve 402 for a pipeline inspection dig. The outage is expected to last 2days. During this outage, the capacity through Houstonia will be limited to 1,180 million cubic feet per day. The scheduled outage is part of an ongoing integrity program conducted by Panhandle.

* TransColorado Gas Transmission Company announced on May 27 that maintenance was scheduled at its Whitewater Compressor Station in Colorado on Wednesday, May 28. Capacity through Segment 220 will be limited to 340,000 decatherms (Dth) from 375,000 Dth and capacity through Segment 240 will be limited to 390,000 Dth from 425,000 Dth. Based on the current level of nominations, interruptible transportation and secondary and primary firm transportation quantities are at risk of not being fully scheduled.

* Williams Northwest Pipeline declared a deficiency period at the Moab Compressor Station effective May 28, as a result of primary firm nomination requests exceeding available capacity of 211,000 Dth per day (Dth/d). Northwest was performing a pig run between the Moab and Pleasant View compressor stations, both located in Utah, which required the daily deficiency volume to be set at 144,000 Dth/d based on a design capacity of 355,000 Dth/d. The deficiency period lasted for 24 hours and ended once the design capacity was restored.