6-18-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (6/15) energy settlements:
July NYMEX gas: $7.918
Summer: July-October ’07: $8.10, Winter ’07-’08: $9.76
The NYMEX one-year strip $8.92, 2-year strip $9.00, 3-year $8.93
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.864, Last Summer: $6.33
Last winter: $7.16
July Crude oil: $68.00, #2 oil $2.01

Natural gas stayed in its trading range even as crude oil clearly broke through technical resistance, making its highest weekly close since August 2006. I’d love to see the natural gas positions that commodity and hedge fund have taken on ICE (Intercontinental Exchange). It must look like two NFL teams preparing for a goal line stand. If the bulls get the hurricane they are looking for, gas is up $2 quick as a cat. But if the season is normal, gas comes off like a cheap prom dress and you’re $2 cheaper. And mark my words, some hedge fund won’t manage its risk properly and we’ll read about another loss position that will affect trading. Last year, it was Amaranth and it eventually took the prompt month under $5. As an end user facing the official start of summer, I see your choices as either partially hedging your future requirements or accruing funds for a potential run up. If you are the former, buy 50% of your needs through Sept or Oct when the prompt month trades in the $7.50-$7.60 range. The premium that you pay to hedge those months is only $0.50 higher than the last 4 monthly expirations. Another reason to buy; Commercial interests that were net short are now basically flat. They don’t want the risk either.

US storage is now at 2.255 Tcf, requiring an average weekly injection of only 54.5 Bcf to match last year’s record level. European storage facilities are forecast to be full in July, and with the Norway-UK pipeline being completed next month, the UK will take fewer LNG cargos from the spot market. That should give the US more gas to meet CDD (cooling degree day) needs while still refilling storage. Bulls are banking on several weeks of storage withdrawals during high CCD weeks to lead to a lower eventual total.

Since we became dependent on imported LNG to meet our incremental gas needs, I compare the US gas industry to a “just in time” delivery system, with storage providing the cushion for us. New storage project abound, with the latest being announced last week by Dominion Energy, which plans to spend up to $700M to build a 50-Bcf salt-cavern storage facility to serve the Northeast and Mid-Atlantic markets. Solutions to a gas industry overhaul take time, planning and huge resources. This facility will be placed into service in 2014.

Just to show we’re not alone without an energy plan. Abu Dhabi will have to divert gas from its oilfield injection program this summer to run power and desalination plants. The EIA reported that the UAE will run two of its power plants on 50 tanker trucks of fuel oil a day, which is relatively scarce due to limited refining capacity. Kuwait has warned its citizens there will be power cuts this summer. Qatar, with the world’s 3rd largest gas reserves, Saudi Arabia and Oman are all planning to build coal fired power plants. It’s more profitable to ship us clean burning natural gas to meet air quality standards while they burn coal.

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