5-7-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (5/05) energy settlements:
June NYMEX gas: $7.938
Summer: June-October ’07: $8.157, Winter ’07-’08: $9.667
The NYMEX one-year strip $8.82, 2-year strip $8.85, 3-year $8.73
(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: $61.92, #2 oil $1.8309

The short term subjects worth discussing this week are the daily doji we saw on Friday, the persistence of the current trading range and the lingering clean up of the Bank of Montreal’s trading losses.

Long time readers know that a doji is when the opening and closing price for a timeframe is the same, and it usually means a change in the price trend is impending. Our current trading range has been contained on the topside around $8 since February 2006, and this is the 8th time this $8.00 mark has been tested since then. You remember the stat, we’ve only had 11 daily closes above $8 and 12 daily closes below $5.50 in the last 64 weeks. Is the streak over and we’re off to a higher trading range? I think not and expect slightly lower prices with the traditional decline into July 4th ahead of us.

Market characteristics at week’s end were indicative that BoM was still a buyer as they continue unwinding half a billion dollars worth of bad trades. I don’t see prices declining until they finish buying to cover their shorts.

Fundamentals remain very good with storage filled to 19% above the 5-year average and a $2.00/DT profit for storage holders to harvest if they inject now. Production and LNG supplies are up year over year. Notwithstanding the Middle East malaise which provides a steady bullish backdrop, it is mostly fear of the upcoming hurricane season that keeps gas prices high, and that’s the crap shoot for consumers. Absent a seers knowledge of the weather, I can only advise that any price spike related to this hurricane season should be lower and of a shorter duration than in 2005.

Do not buy longer term gas now. Gas has expired above Friday’s closing price only once since Feb ‘06, and the average expiration price for the past 36 months is $7.52. ($6.72 for the last 12 consecutive months.)

A subsidiary of Italy’s Eni paid Dominion Resources $4.76B, or $4.75/ Mcf equivalent for proved reserves and $2.71/Mcfe for all categories of reserves for gas and oil in the Gulf of Mexico, a price that surpasses other recent Gulf deals.

We’re going to have some serious second thoughts about supporting corn based ethanol production. The US has 116 ethanol distilleries, with 78 plants under construction and 7 undergoing expansion. If all the new plants and expansions come on line, total capacity will be above 12 billion gallons per year. Up to 95% of U.S. ethanol plants use natural gas boilers because they are 7 times cheaper than ones that burn coal and corn fields consume large quantities of ammonia, which comes from natural gas. Recent Raymond James research says the ethanol boom could boost U.S. gas demand by 1% over the next two years. A Pennsylvania farmer put it best, “It looks like we’re going to take the last six inches of Midwest topsoil and burn it in our gas tanks.”

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