5-14-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (5/11) energy settlements:
June NYMEX gas: $7.899
Summer: June-October ’07: $8.132, Winter ’07-’08: $9.654
The NYMEX one-year strip $8.80, 2-year strip $8.84, 3-year $8.74
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.72, Last Summer: $6.33
Last winter: $7.16
June Crude oil: $62.37, #2 oil $1.8823

Rumors of another non-commercial trader with an oversized position circled the gas markets last week. Big lot trades on ICE fiercely protecting $7.60 and corresponding trades propping up the NYMEX have many a sage trader thinking that somebody is holding a huge bullish position. The speculator must be counting on an early and active hurricane season because fundamentals don’t support such exuberance.

Gas storage, at 1.747 Tcf, is 200 Bcf ahead of the 5-year average. On the west coast, linepack on some systems is creating the potential for high-inventory operational flow orders. In the Mid-Continent, storage injection programs offer the only support to otherwise declining cash markets. US gas production is up and drilling activity during Q1 2007 set a 21-year high with 11,771 well completions in the 90 day period.

LNG receipts are at record highs while storage additions provide greater supply certainty and we’ve added 12.3 Bcfd of new pipeline capacity in the last year. Meanwhile, production gains in Texas, Oklahoma, and Wyoming are taking some pressure off of GOM producers in the event of another disruption.

All that said, the hedge funds rule this market and without reporting requirements for large traders in the OTC, we are somewhat at their mercy. Daily volatility has declined to $0.25 and we need to keep an eye on it. Prices historically rally out of low daily volatility.Keep triggers in place to buy additional future gas on a front month trade in the $7.25-7.30 range. The gas charts suggest that a breakout, either up or down, from the current range will occur in early June.

Unleaded gasoline remains the leader of the energy pack and it is the only commodity I view as potentially “scarce.” We need to keep an eye on it as it could trigger movement in the rest of the energy complex.

Oil and gas are the oxygen supply of the industrialized world.That’s why it was a blow to Europe when Turkmenistan and Kazakhstan signed a deal with Vladimir Putin to pipe their enormous gas reserves to Russia rather than directly to Europe. Turkmenistan has the 5th largest gas reserves in the world. Russia sells gas domestically at subsidized prices, then markets excess gas to Europe at market rates. The coup for Putin enriches Gazprom coffers while it forces Europe to look to LNG for supply diversity, which exacerbates long term US supply problems.

Here’s a shocker: Two Alaskan oil executives and three Alaskan politicians, including a former speaker of the House, were charged with bribery over the proposed gas pipeline from the North Slope to the Lower48 states. I suspect it is the tip of the iceberg. Alaskan gas should be processed as LNG or as gas-to-liquids and shipped to the most profitable markets, but the $20B plus boondoggle would make too many crooks wealthy and when it proves uneconomic, the American taxpayer willbail it out, so the project trudges forward.

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