5-18-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (5/18) energy settlements:
June NYMEX gas: $7.944
Summer: June-October '07: $8.22, Winter '07-'08: $9.74
The NYMEX one-year strip $8.88, 2-year strip $8.92, 3-year $8.75
(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: $64.94, #2 oil $1.915

The Bank of Montreal announced that brokers hid an additional $200 M in gas trading losses, bringing their total losses to the $700 M range and it was obvious from trading activity last week that those positions have not been closed out. Through it all, gas remains range bound as it managed to settle for the week below $8 even after trading into a daily price gap left since Dec. '06. Last week's high was $8.23. The gap extends from $8.13 to $8.35. No doubt, it will be tested again this week as BoM is forced to buy more contracts.

Friday's trade to $8.23 represented a 43% increase over the Q1 low. The average Q2 run up since 2002 is 48% (50% over life of NYMEX). Last year, only 5 months after experiencing $15 gas, the Q2 high only reached $8.28, a 28% increase over the Q1 low, and that was at a time when fear was justifiable since we had production deficiencies. Still there are always those who say, "It's different this time." The most recent of those no longer work for BoM. I make this point because I'm hearing what we all hear every year at this time. "Summer will be hotter than normal." "Hurricane season will be worse than normal." "Storage won't be refilled and we'll run out of gas next winter." Maybe the funds see enough new traders in this market to take prices higher on fear alone. Since there's no transparency in the OTC markets and no chance of legislation requiring reporting before this hurricane and cooling season is over, we can't know about their furtive trading tactics. All I know is this doesn't look like a bull market. Open interests are declining and in fact June interests are roughly half of what May's were a week before expiration.

Truth of the matter is that the gas industry is in better shape than it was in 2005. Storage was at 1.599 Bcf then and it is 1.842 Bcf now. We've got more production, more LNG, and best of all more experience. We've got very good infrastructure, so if the fear mongers are correct and we have a genuinely bad weather event, the fundamentally improved infrastructure will make this a briefer price spike than in '05-'06.

The average NYMEX settlement price for 2005 was $8.62. The average settlement price for the 12 months immediately following Katrina and Rita was $9.16. The future strip prices have all of that built into them, and that's a recipe for more hedge fund failures if the fear mongers can't force the market higher.

What should consumers do? Keep your existing triggers in place to make additional purchases and don't chase gas during the 2nd quarter. You'll be better off in the spot market for your remaining gas needs than buying forward at these prices. I expect June expiration in the $7.50-7.60 range.

The single most important factor that will stabilize or even lower natural gas prices by the end of this decade will be the pipelines providing access to "stranded" gas in the Paradox, Piceance and Uinta Basins of Colorado and Utah. Their store of tight sand gas and shale gas deposits represent 1/3rd of US reserves, but the traditional pipeline paths relegated these reserves to "peaking" gas for the west coast markets. Kinder Morgan's Rockies Express Pipeline (REX) will take these reserves to mid-con and eastern markets by the winter of 2008, adding value for the producers while lowering costs for consumers even in areas where REX doesn't flow. There is light at the end of this tunnel. If you'd like detailed information about this 1,678-mile pipeline with the capacity to move 1.8 Bcfd to eastern markets, just do a search on Rockies Express Pipeline.

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