2-5-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:
Friday (2/2) energy settlements:
March NYMEX closed: $7.437
Summer ’07: $7.748, Winter ’07-’08: $8.96
The NYMEX one-year strip $8.13, 2-year strip $8.06, 3-year $7.91
4-year $7.77, 5-year $7.63 (Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.57, Last Summer: $6.33
January Crude oil: $59.21, #2 oil $1.684

The February NYMEX natural gas contract expired at $6.917. Now, the March contract is doing what it has done in early February for 13 of the last 14 years, run up and then decline into expiration. In light of the $9/Bbl run up in crude, it’s surprising that gas hasn’t run up even further. Even as the coldest weather of this season moves across our most heavily populated areas, we see signs that the run up will be short lived. First of all, Punxsutawney Phil didn’t see his shadow on Friday. All the satellite equipped forecasters seem to agree with the furry prognosticator, issuing reports that a warm up will begin in mid-February.

There is significance to Ground Hog’s day in the gas industry as it is the modern manifestation of the ancient celebration marking the "cross-quarter day" of the season, the day half way between Winter Solstice and Spring Equinox. In other words, winter is more than halfway over and while fear mongers talk about the reduced surplus in natural gas storage, it’s a good time to do the math. Last week, the EIA reported a withdrawal of 186 Bcf, leaving us with a record level for this time of year of 2.571 Tcf. You would have to make that 186 Bcf drawdown every week until March 31st to take storage below 1 Tcf and if this week’s report is 200 Bcf and we withdraw 100 B’s per week until the end of March, we’ll still have the second highest all-time storage inventory exiting this winter.

Wait on buying longer term natural gas. The 1st quarter low should come in around the expiration of the March or April gas contract.

While the news is filled with record profits from Exxon-Mobil and Chevron, the profit margin on natural gas produced from newly drilled wells isn’t too spectacular according to CERA, Cambridge Energy Research Associates. They reported that the finding cost for independent producers since 2005 ranged from $4 to $12/Mcf, and that new discoveries would fail to return a 10% return on investment. High rig rates and soaring service costs have begun to erode the profit in many wells despite strong market prices. All the while, the record number of well completions is “being totally offset by declining per-well productivity.” The mature nature of North American reservoirs means that new gas comes from reservoirs that are “deeper, smaller, technically more challenging or more distant from markets”.

The first gas-to-liquids products produced by the Oryx GTL plant in Qatar will be ready for international markets by the end of March. This is the world's first commercial scale GTL plant using the new, Sasol low-temperature process. The plant will convert 330 MMcfd from Qatar's vast North field into 34,000 b/d of ultra low-sulfur diesel, 24,000 b/d of diesel, 9,000 b/d of naphtha, and 1,000 b/d of liquid petroleum gas. The diesels will be sent to Europe and naphtha to the Far East. The LPG will be used for local consumption. This process should be considered as an alternative to an Alaskan gas pipeline.

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