7-16-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (7/13) energy settlements:
August NYMEX gas: $6.662
Summer: August-October ’07: $6.79, Winter ’07-’08: $8.47
The NYMEX one-year strip $7.86, 2-year strip $8.16, 3-year $8.21
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.951, Last Summer: $6.33
Last winter: $7.16
August Crude oil: $73.93, #2 oil $2.111

Gas traded to a new Q3 low of $6.33 last week as non-commercial traders increased their net short positions to extreme levels, before short covering rallied gas on Friday. Commercials increased their net long positions; always a sign that prices will begin to rally. But any rally will be contained by a healthy set of fundamental conditions. As of the week ending 7/6, the EIA reported 2.625 Tcf of gas already in storage. Even though last week’s reported 106 Bcf injection included a 10 Bcf reclassification of base gas to working storage, we still need less then a 39 Bcf per week average injection to reach last year’s all-time record level. Projected injections for the new two week are 68 Bcf (reflecting power generation usage during the hot weather) and 89 Bcf for the week ending 7/19. This is an opportunity to buy some future gas for needs through January.

Better gas market transparency appears to be in our future. The Senate’s Permanent Subcommittee on Investigations was told by ICE CEO Jeffrey Sprecher, that he would have “no objections” to being brought under the same regulatory rules as the NYMEX, as long as all of the OTC trading platforms were also included in the reporting requirements. Some of the CFTC commissioners finally broke ranks with the Director and admitted that the current system was responsible for the excessive speculation by Amaranth, but Acting Director, Walter Lukken, who took over the job after former Director Reuben Jeffery resigned prior to his scheduled testimony, held the party line that speculators cannot adversely affect trading. A house bill for better market transparency and elimination of the “Enron exemption” for OTC trading has been drafted for presentation in the US House. A lot of hard work has gone into this by the APGA, IECA, and hopefully many of you. Thanks, and here’s hoping for passage in both houses.

Crude oil remains stronger than new rope as inventories decline worldwide last week. With OPEC sending no signal to increase output, the pressure remains to retest the all-time previous high. Unleaded prices declined due to better than expected gains in inventories in spite of the BP refinery outage in the US.

A report released last week by the International Energy Agency stated what most industry participants intuit, that energy demand is growing in developed nations as people become accustomed to higher price and return to their previous trends, but the real growth is coming from developing nations as everything from refrigeration, automobiles and low cost airlines consume more oil products, and an oil shortage looms within 5 years. World oil consumption is growing at a steady 2.2% annually while we must replace over 3 million barrels per day annually to offset declines in mature fields. The report says that by 2010, OPEC will be very tight on spare capacity and by 2012 demand will be limited by higher prices. We are certainly in a secular bull market for commodities and oil and gas prices will increase substantially in the next decade.

One major concern about future oil and gas development is the concentration of reserves in national oil companies. One only has to remember the sorry state of former Soviet Union production when Yeltsin let in US oilmen, or see the demise of the Iranian oil industry to understand the inefficiencies of the State run companies. Democracy under Yeltsin proved to be a Wild West asset grab by the Oligarchs, so Putin lead the bloodless coup that put the KGB back in charge of the country and since then he has steadily brought energy assets back under Russian control. Oligarchs who played ball got to keep their jobs at a reduced level, while the renegades sit in prison cells over “tax issues.” He has kicked out one major oil company after another on contractual technicalities, raising fears of more inefficiencies in future production capabilities at a time when the world sorely needs every barrel. But lately, a new paradigm seems to be taking shape whereby the value of outsider expertise is being recognized, and major oil companies can have minority ownership in individual properties. Last week, Gazprom struck a deal with Total on an arctic gas field. Two years ago I called Putin the most important new oil sheik in the world. Now he has to prove if he can be a smart oilman too.

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