4-2-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (3/30) energy settlements:
May NYMEX gas: $7.73
May-October ’07: $8.024, Winter ’07-’08: $9.572
The NYMEX one-year strip $8.68, 2-year strip $8.63, 3-year $8.48
(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: $65.87, #2 oil $1.879

The small withdrawal of 22 Bcf reported last week should be followed by an injection in the 30-40 Bcf range in the final week of March, which will close out the “traditional” withdrawal season around 1.55 Tcf, second only to last year’s 1.695, and well above the 1.134 average. But that’s only part of the story because the nearly $3.00/Dt spread between cash prices and the winter NYMEX provide storage holders a strong economic incentive to inject at every opportunity. As a result, storage inventories will continue to accrete while the added demand for gas will also keep prompt month NYMEX prices relatively high.

What Katrina and Rita taught us is the importance of maintaining high levels of storage. The “fear premium” in forward prices that consumers complain about also creates the financial incentive to fill storage which will help reduce the price spike from the next disaster as well as shorten the duration of the spike. Because of this, large gas consumers should look into “self-insuring” their gas costs. Set a baseline price of $7.50 or $8.00 and deposit money into a sinking fund each month prices are lower, withdrawing funds during periods when gas prices exceed your baseline. You can still hedge longer term if prices across the board fall below your baseline. Otherwise, you have to pay too much of a premium to insure your budget by hedging with NYMEX gas.

We have entered a period of historically bullish activity. The peak price for NYMEX gas during the 2nd Quarter since 2003 is 34% higher than the lowest price of the 1st Quarter. If I run that comparison for the life of the NYMEX gas contract, removing two anomalous years, it is 41%, and 51% if being inclusive. History is not a faultless guide for prognosticating, but it is by and large a very helpful one. Another fun fact is that the expiration prices of March, April and May gas have averaged within a few cents of each other throughout history, so don’t expect a blowout or a bargain with May gas.

Set triggers to buy forward gas when the May contract trades in the $7.25 to $7.30 range.

Since coal can typically absorb CO2 at five times the rate it releases methane, Composite Energy, a Scottish company developing coal-bed methane production is embarking on a two-year study to evaluate carbon dioxide storage in coal-beds as a way of enhancing methane recovery. While other CO2 storage projects store gas in an underground void or rock-matrix, this project will evaluate the ability of CO2 to chemically bond to coal while improving methane production. Now, you can’t say you didn’t learn something this week.

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