3-12-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (3/9) energy settlements:
April NYMEX closed: $7.083
Summer ’07: $7.454, Winter ’07-’08: $8.98
The NYMEX one-year strip $8.09, 2-year strip $8.14, 3-year $8.06
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.61, Last Summer: $6.33
Last Winter: $7.16
April Crude oil: $60.02, #2 oil $1.71

Traders will view last week’s settle below a trend line of daily support as bearish, although failure to close below the weekly trend line that intersected last week at $7.02 probably leaves room for a lot more volatility this week. Last week, the gap at $7.51 was filled and this week’s decline left a gap at $7.33 that will be resistance. The steepness of the weekly line puts this week’s intersection at $7.153 so the bulls have a little tougher position to defend. Market momentum is bearish.

Fundamentally, US supplies have increased with an all-time one day record LNG send out of 3.3 Bcf last week courtesy of UK prices remaining in the $3 range. A milder weather forecast nationwide also bodes for lower prices in the short term.

With technical and fundamental indicators predicting lower prices, why was Friday’s settlement the highest price ever for April gas at this time of year? Why is the summer strip $0.27 higher than it was this time last year, and the one year over $8.00, when the past 12 year’s average settlement price was $6.61? Fear mongers can project with near certainty that this hurricane season will be worse than last and that global warming will cause more gas demand for power that will draw from storage that has fallen below year ago levels. That’s all conjecture, but one bullish fact is that Canadian gas exports to the US are declining as tar sands extraction consumes more gas, and as rising operating and drilling costs are causing our northern neighbors to shut in low volume wells and hold off on drilling new wells.

Still, there is too much premium built into future prices and I recommend that you continue to wait to make longer term purchases. There is significant support in the April contract at $6.50 and that is a prudent place to set triggers to buy some future gas. But, if that doesn’t hold, a retest of the $5.50 range would become the next target.

Looking ahead, the proposed $45B buy out of TXU is wrapped in “green” concern about reducing 11 proposed coal fired power plants to only 3 and fueling the rest with natural gas. Goldman Sachs helped arrange the deal and that alerted my intuition. I’m all for a cleaner environment and my generation needs to improve its record, but I’ve wondered what the next act for the hedge funds would be ever since they plunged into natural gas trading. The logical step is to own or control utility assets as a further hedge for their commodity bets. Arbitraging physical storage against gas futures gives them added optionality to lower their risks. Then toss in their choice to build more gas fired plants and the option to use them at will, along with some greenhouse gas credits to trade, and they’ve got a pat hand. So, while we’re caught up in a debate about transparency which will probably be resolved by more voluntary disclosures, I’m betting that the minds of the fund managers are already wondering, “How can we corner the market on wind power?”

In fairness, Goldman Sachs’ management has shown a strong commitment toward environmental improvements, even to the point of providing only hybrid limousines for its execs.

Lastly, if mention of hurricanes earlier peeked your concern, then you may be interested in knowing that hurricane futures will now be traded on the exchange. Futures will sell based on the severity of a storm which is determined by both wind speed and overall storm size. This is unlike the category size commonly used to rate hurricanes which only takes into account the wind speed. Katrina was a size 19 storm by this new system. The futures contract value will be $1000 per point per contract. This means that if you purchase a hurricane futures contract for a size 19 hurricane, and another Katrina size storm hits, the futures contract seller would pay out $19,000. The cost to buy a futures contract will float in the market. This will be a popular financial option for insurance carriers to hedge their risk against, and it will be interesting to see how others may utilize it.

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