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12-17-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (12/14) energy settlements:
Natural Gas: Jan '08-$7.025
Jan-Mar '08-$7.12
Summer '08-$7.39
One Year Strip-$7.46

Last week's close was very weak with the Jan. contract settling below a trendline that has provided support for the life of that contract. Without a rally this week, Jan seems destined to trade lower. Judging by the enormous increase in open interests, there is a very large bear spread play going on with substantial long positions in summer '08 gas and accompanying shorts in Jan-Mar '08 which should help to drive down the prompt month price.
This December rally was the smallest percentage run up in the history of the NYMEX at only 8%. Two previous diminutive rallies were in '97 and '04 at 11%.

If the Q1 percentage decline from the Q4 high matches the average of the past 5 years, we'll have a low that is very close to the one we had last year. While you need to have your triggers in place to buy some future gas, a bottom near the end of January looks more likely from a technical perspective than it does in the next 10 days, but stay ready since no one will "ring the bell" to tell us when the bottom has arrived.

Please feel free to call me to discuss any questions you may have about your specific energy plan.

12-10-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (12/7) energy settlements:
January NYMEX gas closed: $7.155
Winter (Jan-March ‘08): $7.22
The NYMEX one-year strip $7.54, 2-year strip $7.90, 3-year $8.03
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.86, Last Summer: $6.79
Last winter: $7.16
Crude oil: $88.28, #2 oil $2.504

The historical tendency for natural gas this week is for prices to increase. With warmer than normal weather and storage so full that many storage holders are already beginning to baseload it into their supplies to make sure they get it out, it’s hard to paint a bullish scenario. If it does rally, it will be because commercial end users are buying from large speculators who are building an impressive short position. Commercial end users owned 354,480 contracts at the end of November but currently own 402,177. Why the utilities, etc want to buy now is a mystery to me and because we don’t have transparency into OTC markets, I can’t be sure that they haven’t placed offsetting bets on other exchanges, but since the end of October NYMEX open interest has increased from 741,551 contracts to 841,926 while prices have declined more than a dollar, which means that there are more sellers in the market than there are buyers, and I want you to hold off on being a buyer yourself until we see lower strip prices. Current prices still carry too much premium to the 2 and 3 year averages.

Looking ahead, Indonesia’s state-owned oil company has decided to reduce its annual supply of LNG to Japan, the world's biggest LNG importer, from the current 12 million metric tons to 2-3 million tons, and reduce overall LNG exports from 15 million tons down to 5, as its production goes into greater decline. The reduction will deal a serious blow to Japan’s long-term energy security at a time when global LNG demand is surging.

In a nearly related story, Panama will build two new three-chamber locks at the Atlantic and Pacific ends of the canal that are large enough to allow the passage of LNG tankers as large as 150,000 cu m. The $5.2-billion project will be completed by 2014. In its current configuration, the canal can accommodate only the 17 LNG tankers ships that are 100,000 cu m or smaller. The enlargement could open up new trading options for Trinidad, Chile, Japan, Korea, Qatar …………..the world.


Please feel free to call me to discuss any questions you may have about your specific energy plan.

12-3-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (11/30) energy settlements:
January NYMEX gas closed: $7.302
Winter ’07-’08: $7.33
The NYMEX one-year strip $7.55, 2-year strip $7.86, 3-year $7.97
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.86, Last Summer: $6.79
Last winter: $7.16
Crude oil: $88.71, #2 oil $2.515

November weather was mild with minimal storage withdrawals as the EIA reported gas storage at a record 3.528 Tcf as of 11/23. That is 106 Bcf higher than last year at this time and 301 above the 5-year average. Gas consumption rarely reached 80 Bcfgd during the month.

Domestic LNG receipts are negligible as Europe has begun to take all Atlantic Basin shipments. This is normal procedure for wintertime. The US sets the floor for global LNG prices since we are the only country in the world that generally imports LNG out of opportunity rather than necessity thanks to the best gas storage system in the world.

With such bearish fundamentals, one would expect prices to fall further now, but the tendency during December is for gas prices to run up mid month and then settle lower by month’s end. This has occurred for 17 consecutive years so I strongly advise that you do not buy gas during the mid-month rally.

Last year’s January contract settlement nearly coincided with the lowest price for the 2007 strip, so in anticipation of another potential end-of-year low it would be prudent get all “powers that be” in regards to gas purchasing and agree on where you want to set your triggers to buy longer term gas. Commodity prices tend to “return to the mean price” during calm times and the average monthly settlement price for the past 2 years is $6.86. Advisable targets for setting triggers to purchase the 2008 strip range from $7.25 to $7.00. And no one will “ring the bell” to tell you when the bottom is in for gas.

European consumers will pay up to a 17% increase for gas provided by Gazprom in 2008 as it announced that western European prices would rise to $300-$350 per thousand cubic meters. At 35.1 cu. feet to the cu. meter, we’re talking about up to $10/Dt NYMEX equivalent for gas.

Dubai is set to launch an LNG futures exchange. This would allow buyers and sellers to establish long-term contractual prices required to secure investments in production and receipt facilities, as well as a vehicle to unwind long term fixed priced deals. The new contract could also give the world's top LNG suppliers, as well as the Goldman Sachs types, a single pressure point to manipulate the global price of a major energy resource.

Production from Mexico’s two biggest Gulf of Mexico oilfields has decline over 15% in the past year alone and shows signs of irreversible depletion. Poorly managed nationalized oil companies in Mexico and throughout South America will cause continued pressure on oil prices in ’08 as New World oil production lags behind its potential. Venezuelan production, which is currently 2.5 MM bbl/d, could have been as much as 6 MM bbl/d if it had remained in the hands of the majors.

Please feel free to call me to discuss any questions you may have about your specific energy plan.

11-26-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (11/23) energy settlements:
December NYMEX gas closed: $7.70
Winter ’07-’08: $7.92
The NYMEX one-year strip $7.93, 2-year strip $8.17, 3-year $8.24
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.953, Last Summer: $6.79
Last winter: $7.16
Crude oil: $98.18, #2 oil $2.70

As gas expired the day after Thanksgiving at $7.70, I was reminded that last year it closed the day before Thanksgiving at $7.70. It’s just another reminder that the trading patterns this year have been very similar. December gas expires this Wednesday and it looks like we will close out slightly lower than the ’07 settlement of $8.318. Keep your triggers in place to buy $7.50 down to $7.25 or accept the expiration price for December gas. Keep the current trading range in mind as you plan future purchases. Over the last 92 trading weeks prices have settled above $8 only 17 times (twice during ’07) and below $5.50 only 12 times (once ’07), with only one monthly settlement above $8 during that period.

After the December contract expiration, the tendency is for gas to rally during mid-December. Please do not make a fear based purchase of future gas during that rally. Last year, the low for Q1 prices arrived on December 28th. I don’t expect that to happen this year, but anything can in this market so it is time to gather the decision makers together and determine what you will do if gas prices come to your longer term buying targets.

As we watch crude oil toy with the $100 mark, it reminds me of the difficulty in trying to set parameters to establish what a fair value should be for any commodity. History has shown us that markets can go far higher than we ever expected and vice versa, far lower than we dreamed. As we approach the Q1 low, it is a time to reassess if you are a budget driven gas buyer or a low cost buyer. Since Katrina and Rita, the fear premium built into future gas prices has made hedging for a year or more an expensive practice that has been rewarded only briefly during the 2nd and 4th quarter run ups. In our southeastern markets, with the exception of the Katrina-Rita timeframe buying interstate basis month to month has always been cheaper than hedging it on an annual basis. So, the deck is stacked against the cautious, while Monday morning quarterbacks proliferate among those who would benchmark the performance of the poor gas buyer.

When I peer into my crystal ball for 2008, I see more domestic production, more LNG supplies, and new pipelines connecting stranded gas to the interstate system. It’s a recipe to become a bear, but something new has been injected into the mix. The combination of a weak dollar and internationally traded LNG filling our marginal supply needs has me concerned. At 8 Euros, gas is worth only $5.37 to Europeans, or better stated, if they are willing to pay 8 Euros, we’ve got to pay $11.92 to match them, and the greenback doesn’t look to get any stronger as we sell more debt to finance the Iraq War. Fortunately, the old European standard of pricing gas in a 6:1 ratio against crude oil is vanishing but no new system has yet emerged. The marketplace will watch with great interest to see if their new pricing standard is based upon associated products such as fertilizer and ammonia. I’ll have more to say on this topic, as well as discussions about where the one-year strip price could trade during the Q1 low.

What does a rise in gasoline prices mean to the US economy? According to “The Economist”, a one cent rise in the price of gasoline equals a $1.2 billion reduction in disposable income and results in a $600 million decline in consumer spending, so the $0.80/gallon premium we are paying over this time last year is a mammoth “tax” on Americans. But, as badly as higher gasoline prices affect our economy, it is less than the impact from tighter credit and falling housing prices. According to the same article, residential housing makes up 1/3 of all household wealth at $21 trillion. A 10% decline in housing prices has a far greater affect on consumer spending that the “oil tax” but together they make another “perfect storm” that we must withstand.

Please feel free to call me to discuss any questions you may have about your specific energy plan.

11-19-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (11/16) energy settlements:
December NYMEX gas closed: $8.001
Winter ’07-’08: $8.24
The NYMEX one-year strip $8.16, 2-year strip $8.34, 3-year $8.34
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.953, Last Summer: $6.79
Last winter: $7.16
Crude oil: $95.10, #2 oil $2.587

Happy Thanksgiving! Even as we survey all the craziness that surrounds us, we have so many reasons to give thanks.

Natural gas is trading in a manner very similar in action and price to last year. The only difference of concern is the net long position held by Commercial traders, usually indicative of an impending price increase, but perhaps they are just getting set for the traditional December rally. Last week’s settle above $8 was only the 2nd this year and it’s worth noting that the only expiration above $7.60 in the last 21 months was last December.

Throughout the life of the NYMEX gas contract, the January contract price has increased about 34% from the post-Thanksgiving low until roughly mid-December. If I take out 4 anomalous years dating back to 1995, the average upswing is about 17% or about $1.30 in 2007 terms. This is important to remember if your goal is to delay purchasing any gas for January or beyond in anticipation of an early Q1 low. In the past, this rally has caused some people to make “fear” purchases of late winter gas only to regret it when prices decline. Keep triggers in place to Buy December gas at $7.50 to $7.25 or accept expiration.

Don’t expect a Christmas gift from Congress. The farm bill which includes an amendment that would close the so-called Enron loophole by boosting the CFTC’s oversight of exempt commercial markets failed in the Senate last week, probably derailing its passage before year’s end.

Our abundant coal reserves could be used for future power generation, which would free up natural gas supplies for industrial and commercial use, but coal plants already account for nearly 40% of all U.S. carbon dioxide emissions. In spite of our efforts, mastering the technology to build a CO2 sequestered coal plant is outside of our reach right now. Tampa Electric Co. has shelved a $2 B, 632 Mw coal gasification power plant that was being built to meet baseload generation needs, stating that the investment was too risky. For perspective, the construction cost per/Kw is 60% greater than a new nuclear plant. TECO already owns and operates the only working integrated gasification combined cycle (IGCC) plant, a scant 260 MW unit that has been in service since 1996 and was mostly paid for by the Energy Department's Clean Coal Technology program.

The nuclear power industry will have to step up its mining and processing operations after years in hiatus. There are 440 commercial power plants, 284 research reactors and 220 marine reactors that require uranium to fuel their operations, and last year they used nearly twice the output of all the uranium mines in the world. Mining capacity fell behind after the Cold War nuclear arms production ground to a halt. Enough uranium was stockpiled to feed existing reactors for many years, so during the 80’s and 90’s little mining occurred. Worldwide uranium demand is roughly 150 million lbs per year. More than 100 new reactors are planned worldwide: 21 in the U.S., 30 in China, 11 in Japan, 20 in India, and 42 in Russia.

Please feel free to call me to discuss any questions you may have about your specific energy plan.

11-12-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (11/9) energy settlements:
December NYMEX gas closed: $7.897
Winter ’07-’08: $8.18
The NYMEX one-year strip $8.14, 2-year strip $8.33, 3-year $8.34
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.953, Last Summer: $6.79
Last winter: $7.16
Crude oil: $96.32, #2 oil $2.618

We finished the injection season with an all-time record high of 3.545 Tcf. Coincidentally, the EIA added to the good news last week by reporting that U.S. natural gas proved reserves increased 3% in 2006 to the highest level since 1976, the eighth year in a row that reserves have increased, while crude reserves declined 4 %.

The seasonal tendency for natural gas is for the December contract to rally in mid-November and then to fall about 15% from the top of that rally into a Thanksgiving holiday decline. Since this year is paralleling ’06 so closely, I am looking for the same price action and advise you to maintain your triggers to buy additional December gas in the $7.25-$7.50 range or to wait on contract expiration. The January gas contract always rallies in mid-December but I’d avoid buying any of it until expiration. Jan. ’07 expired at $5.838, almost $3 lower than the current price for Jan ‘08.

With crude oil setting new all-time highs each week, alternative fuels get plenty of press. Recognizing the futility of corn based ethanol, Shell is helping to grubstake Range Fuels in a project to make ethanol from pine tree pulp, with optimism that commercial production could come in as little as 5 years. Meanwhile, BP is hoping butanol, the longer carbon chain alcohol, can be commercially produced sooner than cellulose ethanol. Butanol can overcome some of the drawbacks of ethanol such as limited mileage, water attraction and limited blending in standard vehicles. The dilemma facing ethanol is called the E-10 wall. The properties of butanol allow you to blend it with gasoline up to 18% and to transport it through pipelines. It has 88% of the mileage of gasoline, compared to less than 70% for ethanol. Butanol is still in the early development phase.

A charge on carbon generation will most likely be part of our energy future. The calculus of credits is based on the cost per ton of CO2. At $20 to $30 a ton, the 1.9 lbs of CO2 emitted to produce a kilowatt-hour of electricity from a coal plant costs 2 to 3 cents. Wind power would be comparably price with coal at a $25/ton carbon charge. Nuclear power makes sense at a negligible carbon cost. The source of biofuels will even be considered. Ethanol carries a different carbon footprint if made from corn instead of cellulose. If you’d like to get a feel for how to calculate carbon costs, visit www.Terrapass.com or www.Carbonfund.org

Please feel free to call me to discuss any questions you may have about your specific energy plan.