7-9-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (7/6) energy settlements:
August NYMEX gas: $6.444
Summer: August-October ’07: $6.58, Winter ’07-’08: $8.323
The NYMEX one-year strip $7.67, 2-year strip $7.98, 3-year $8.05
(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: $72.81, #2 oil $2.095

Last week’s storage report put us at 2.521 Tcf, requiring an average weekly injections of only 42 Bcf to reach last year’s levels. That, along with a forecast of milder weather and no tropical activity encouraged bears to sell more gas contracts, as prices approached year end ‘06 lows. The price gap between $6.55 and $6.36 was closed on Friday, and the only question remaining is how much lower we will trade before gas supports. A gap between $5.97 and $6.00 would be the next logical target, and although the weekly RSI is in “extreme” territory, it has certainly been lower in the past before gas markets rallied. But, a rally should occur in the near term.

Simultaneously, #2 oil closed the week at an all-time high while crude oil is within sight of its previous top. Clearly, the funds are buying crude and selling nat gas. We just don’t know to what extent. The CFTC filed a restraining order against Lake Shore Asset Management Ltd. for refusing to permit the CFTC to inspect its records. One can only suppose that Lake Shore’s refusal is due to a combination of violations and being on the wrong side of this long oil/short gas trade.

The market has provided us an opportunity to buy gas. The 20% decline from the Q2 high betters the 5 year average by 2%, and while it appears it will trade lower, this is a good place to buy gas through December or January. The 12-month strip is within $0.01 of it’s late December low. The current premium of the diminishing summer ‘07 strip above a year ago is $.48, but the current discount of the winter ‘08 strip below a year ago is $1.20. We are still in a $5.50-$8.00 trading range and over the last 72 weeks prices have settled above $8 only 15 times and below $5.50 only 12 times. During the last 53 months prices have traded below $6.04 in 31 of 53 month, or about 60% of the time. Pigs get fat, hogs get eaten. Buy some gas at this time.

Last week, BP took delivery of the British Emerald, the world's largest LNG carrier at 155,000 cubic meters, or the equivalent of about 8,800 Dts per day for 365 days. Its dual-fuel technology allows the diesel engines to run on "boil-off" gases from the cargo tanks or on diesel fuel. She is 288m long with a breadth of 44.2m.

China has banned further expansion of its corn ethanol industry, after a 40% increase in pork prices over the past year. In the U.S. land for corn produces only 50 gallons of gasoline equivalent per acre per year, versus an annual gasoline demand of 135 billion gallons. New U.S. ethanol plants coming on line could take 30 percent of next year's corn crop for auto fuel, as well as add to our natural gas supply problems. It’s a farm aid program that no one counting on farmer’s votes is willing to eliminate. Even without ethanol demand, farmers will need to increase crop yields over time due to population growth, and as the growing number of affluent consumers in the world increase their demand for meat. Although sugarcane is 3 times more efficient than corn for ethanol production, ethanol from sugarcane is more expensive than gasoline when crude is $65/Bbl.

South Korea has confirmed deposits of methane hydrates off its coast and their exploration-research program to develop the reserves kicks off this fall with at least 5 wells. South Korea hopes to develop the technology for using gas hydrates by 2015.

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