4-16-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (4/13) energy settlements:
May NYMEX gas: $7.801
Summer: May-October ’07: $8.11, Winter ’07-’08: $9.61
The NYMEX one-year strip $8.75, 2-year strip $8.74, 3-year $8.60
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.64, Last Summer: $6.33
Last winter: $7.16
May Crude oil: $63.63, #2 oil $1.90

Last week, natural gas made a “bearish” divergence in the weekly RSI (Relative Strength Index). In other words, prices moved higher than a week ago but the RSI didn’t confirm that advance by moving higher in lockstep. The significance is that before this recent price run up, gas made a “bullish” weekly divergence in the RSI. Prices traded lower but the RSI didn’t move lower. If natural gas doesn’t trade higher this week, then traders have a reason to sell off of this technical indicator. This may sound like modern witchcraft, but most funds trade gas off of technical analysis. Let’s face it, with storage levels near record highs and more supply than last year, this market didn’t take off because of bullish fundamentals.

Since 2000, the May gas contract has peaked between April 2nd and the 19th and for 60 weeks we’ve been range bound between $5.50 and $8.00 with only 11 daily closes above and 12 below. I expect the $8 resistance (or a quarter or so north of it) to contain this rally.

Don’t purchase gas here. Keep existing triggers in place to buy at lower levels.

125,000 acres of federal land in the San Juan Basin of Colorado was opened to coalbed methane drilling last week. This is a step in the right direction. Federal lands contain an estimated 187 trillion cubic feet of natural gas and 21 billion barrels of oil. That could supply all of America's households for 39 years, and represents more than 30 years worth of current Saudi imports

Due to soaring costs and a lack of experienced workers, Algeria, Africa's largest gas exporter, may scuttle a proposed gas-to-liquids plant. It would have provided 36,000 Bbl/day of GTL diesel fuel. In February, Qatar scrapped a similar GTL project for the same reasons.

Gas reserves are at their highest level in 28 years thanks to about 30,000 gas wells that were completed in the US last year. However, most of those wells were drilled onshore in shale, tight sands and coal seams which are all slow delivery reservoirs. So, despite increased drilling activity, daily US natural gas production is still falling. While the 2006 production volumes of publicly traded companies increased 6.3% over 2005, all of that increase is due to the return of production shut ins following hurricanes Katrina and Rita. Adjusted for the hurricanes, US production actually dropped 3.2% year-over-year, according to Raymond James. These declines have come amid virtually 100% utilization of gas rigs, along with increasing rig counts and improved drilling efficiencies.

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