2-12-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (2/9) energy settlements:
March NYMEX closed: $7.827 (Highest Feb. 9th price ever!)
Summer ’07: $8.087, Winter ’07-’08: $9.423
The NYMEX one-year strip $8.51, 2-year strip $8.44, 3-year $8.27
4-year $8.12, 5-year $7.97 (Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.57, Last Summer: $6.33
January Crude oil: $59.89, #2 oil $1.725

Winter always comes as a surprise to modern man. So, as single digit temps finally arrive in Chicago and lake effect snow covers Buffalo again during February, the modern-day pinstriped Chicken Little bemoans of running out of natural gas before the end of March. Last week, the EIA reported a large withdrawal of 224 Bcf, leaving 2.347 Tcf in the ground, and this week’s report could be an all-time record high of 271 Bcf. With 8 more weeks to report until April 1st, average weekly declines of 105 Bcf would leave inventories at a comfortable 1.5 Tcf. The five-year average weekly draw for this period is 91 Bcf, which would leave us with 1.619 Tcf in storage. If we match last year's average weekly draw of just 70 Bcf, we would have a record 1.787 Tcf left in the ground. Chicken Little’s problem is that he’s long gas and needs to talk prices up so he can get out with minimal losses. Don’t buy the rumor.

During this recent run up in natural gas, we’ve seen extremely high volume but declining total open interests, which is a bearish indicator that a top is near. The number of spreads was down 39,000 contracts last week and the Henry Hub swaps, which are traded in 2500 Dt denominations, declined by 134,795 contracts. Clearly, some speculators are leaving the gas market.

Last week, Goldman Sachs agreed to sell its commodity index to ratings agency Standard & Poor's in a deal that some analysts believe shows the formerly bullish investment bank now believing the secular bull market in oil and gas has ended, or stated in investor parlance, since “everyone else” is now playing energy, as evidence by a 51% growth in open interest in crude since last year, the future prices have been bid up so high that there is too much risk in trading forward positions. Don’t get me wrong, speculative money still sees energy as a lucrative bet, but last year many passive investors lost money in energy which puts their money managers on report to improve performance or watch a flight of funds.

Don’t make longer term purchases at this time. Natural gas will trade lower during the 1st quarter.

Looking ahead, LNG liquefaction projects will be slower getting to market. Cost per ton of LNG per year ($/ton/yr) fell during the ‘90s, to as low at $175/ton/yr. Costs have escalated to $600/ton/yr, and construction times have increased from 36 months per train to 48. Estimations that LNG supplies would match demand in the Atlantic Basin by 2008 now show deficits through 2012. Exacerbating our problem is a US gas quality standard that restricts high BTU content cargo from our pipelines.

Just for grins, the Oil and Gas Journal ranked the cost of driving from New York to L.A. with alternative fuels. Driving a Honda Civic, it takes $215 of gasoline, for an E85 Taurus it’s 53 bushels of corn and a half barrel of oil at $225, for an M 85 methanol Taurus it’s 18 Dts of natural gas and half a barrel of oil at $620, for a VW Golf Biodiesel it’s 800 gallons of vegetable oil and $221, and the winner, a VW using CNG at $110. Only the marginal cost of fuel was considered in the calculations.

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