8-27-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (8/24) energy settlements:
September NYMEX gas closed: $5.523
Summer: September-October ’07: $5.631, Winter ’07-’08: $7.663
The NYMEX one-year strip $7.25, 2-year strip $7.69, 3-year $7.79
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.874, Last Summer: $6.33
Last winter: $7.16
September Crude oil: $71.09, #2 oil $1.997

Working gas in storage was reported to be 2.926 Tcf as of 8/17. At 904 Bcf, producing region storage levels are about 20 Bcf less than where they ended the injection season last year. Total storage levels are 77 Bcf higher than at the same time last year and 333 Bcf higher than the five-year average. With 10 weeks left to report, if injections match the pace set last year for the same period, working gas will rise to more than 3.5 Tcf, and if injections match the 5-year average, storage will reach nearly 3.6 Tcf. Combine storage prospects with an absolutely clear Atlantic and Caribbean storm map, and you’ve got the formula for even lower gas prices.

Over the last 80 weeks natural gas prices have settled above $8 only 15 times and below $5.50 only 12 times. The daily RSI shows an extremely oversold reading of 23, so a brief rally should be in order, but look for prices to move lower as we approach Labor Day.

The only bullish news for gas right now is the high temperatures across the Southeast that have been averaging about 10 degrees above normal with triple digit highs. Demand for gas fired power generation remains very high at 32.4 Bcf/d, but in 30 days we’ll have 1 ½ less hours of sunlight per day to resolve the problem.

Being proactive this time, the CFTC has questioned ICE about traders’ positions in Oct and Nov gas as that spread moved above $1.00 last week. In North Carolina, CUCA (Carolina Utilities Customers Assoc.) succeeded in getting taxes on electricity, natural gas, fuel oil, and propane used by manufacturers to be phased out over the next four years. This victory represents $10 million in savings in 2007-2008 and $20 million for 2008-2009.

Around the globe, Russia has cut crude oil shipments to German refineries by 1/3 of contracted volumes during July and August. No reason has been given but speculation is that Russia wants to force Germany to sell the refineries to them. Remember Marathon’s “Starvin Marvin” truck stops? I don’t think we’re going to like Putin’s “Thrivin Ivan” version of a consolidated oil company.

In a scheme reminiscent of how the Russian government pushed Shell out of Sakhalin, Kazakhstan is threatening to revoke Italian oil company, Eni‘s development license for the Caspian Sea project over “environmental” concerns. The Kashagan field is one of the largest finds in over 30 years and is expected to produce over 1.5 million barrels of oil per day by 2019.

Finally, Duke Energy’s CEO, Jim Rogers has an idea for America that is so novel that Thomas Friedman wrote about it in his NY Times column last week. It is conservation. I grew up with depression era grandparents. They stressed, “Don’t stand there with the refrigerator door open” and “turn off the lights when you leave the room.” This time around we should add “Your waste supports terrorism” and “The Russians are coming.” I hope Mr. Rogers’ ideas catch on.

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

8-20-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (8/17) energy settlements:
September NYMEX gas closed: $7.01
Summer: September-October ’07: $7.07, Winter ’07-’08: $8.52
The NYMEX one-year strip $8.06, 2-year strip $8.31, 3-year $8.32
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.874, Last Summer: $6.33
Last winter: $7.16
September Crude oil: $71.98, #2 oil $2.017

Although hurricane concerns raised September gas prices last week, I prefer to look toward the silver lining. The winter, one, two, and three year strips were all down slightly last week, with some strips being lower than they were two weeks ago when the prompt month was barely over $6.00. More than from fear of Hurricane Dean, this rally stems from short covering by non-commercial traders, evidenced by rising prices on lower volume and lower open interests.

As of August 10th, we have 2.903 Tcf in storage and need injections of only 37 Bcf per week to match last year’s record, but the recent record heat has slowed the injection pace to the 20’s per week. We will make up ground during the cooler days of September and I still expect a Labor Day-ish low in natural gas. For now, it’s time to buckle up and stay on storm watch.

The most bearish scenario would be Cat 3 or lower storms that do little or no damage to energy infrastructure and bring heavy rains far inland which would cool temps and relieve widespread droughts. So, that’s my prayer. Otherwise you should be partially hedged through hurricane season. Even if we have damaging storms, the recovery time will be much quicker than 2005. Any price spike will be lower and of shorter duration this time.

Looking ahead, giant oil fields, defined as those containing at least 500 million barrels of recoverable oil, represent only 507 fields, or 1 % of the total number of oil fields yet discovered, but they produced over 60 % of total 2005 production and account for 65 % of the ultimate recoverable reserve on earth. However, the majority of these giants are over 50 years old. Many of the largest giant fields are in the countries surrounding the Persian Gulf. Every “peak oil” scenario shows the peak occurring at about the same time as the giant fields’ peak. The worst-case scenario shows a peak in world oil production in 2008 and the best-case scenario, using a 1.4 % annual demand growth, peaks in 2018.

It’s been said that South America will be the richest continent in the next century……..and it always will be. The latest guarantor of that forecast is the rush to nationalize the oil industries of the continent, lead by Hugo “born on3rd base and thought I hit a triple” Chavez. Chavez inherited a top notch oil business that was profitable at $25/Bbl and then prices soared to the $70’s. Flush with the windfall of unearned cash, he is tossing it around to his South American friends and promising them great fortunes if they too nationalize their fledgling oil industries. The problem is that his buddies lack the money or expertise to develop the reserves themselves. While they’ll be part of the cause of the next oil boom to $100/Bbl by keeping their production off the market, they’ll be the poor kids watching the parade from the cheap seats. Meanwhile, Venezuela’s production will deteriorate over time just like every other national oil company that thought it was so easy to do it on their own.

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

8-6-07 Energy Update

WEEKLY ENERGY MARKET UPDATE

Friday (8/3) energy settlements:
September NYMEX gas closed: $6.09
Summer: September-October ’07: $6.19, Winter ’07-’08: $8.09
The NYMEX one-year strip $7.69, 2-year strip $8.15, 3-year $8.27
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.874, Last Summer: $6.33
Last winter: $7.16
September Crude oil: $75.48, #2 oil $2.034

Working gas in storage was 2.843 Tcf as of July 27th, 68 Bcf ahead of the same week a year ago, and on track to establish a new all-time record during the remaining 13 weeks of the traditional storage injection season. To date, no production days have been lost to storms and LNG shipments have set an all-time record high.

The vast majority of hurricanes occur during August and Sept, with Sept holding a slight lead. After gas prices decline in July, they rally during mid to late August before declining again during September. The average volatility of such rallies and declines isn’t as significance as the dependability of the repetition. Even during 2005, gas prices declined in September.

During the recent decline in prices, most of you hedged some gas through this hurricane season, but the premium on Q1 gas has us postponing any hedging of the Jan-March time frame. At a strip price of $8.40, those months are above the current trading range and carry quite a premium to the actual average NYMEX settlements of $6.77 for the expirations of Jan-Mar of ‘07. Hope may lie in the price action of those contracts last week, as they settled below previous resistance. Unless you are totally budget driven, wait to buy more Q1 gas. Very soon, storage will be so full that injections will be restricted and the glut of gas in the spot market should take prompt month prices back to or below the July low. That could take $0.30 to $0.50 of premium out of Q1 prices.

Crude oil made a lifetime high last week at $78.70 as nat gas moved lower in what looks like a “buy crude-sell gas” strategy by the funds. At some point, profit taking will reverse the flow, and that may be hastened by an August tropical storm. Energy markets will be weather driven for the next 60 days.

From time to time, supply will become glutted and prices in the near term will be attractive, but a long term secular bull market in oil, oil products and natural gas seems unavoidable. Although BP reports that world oil demand in 2006 grew at the lowest pace since 2001, at 0.7% (half of the average for the past decade), oil production grew by only 0.4%. Alternative energy and conservation will be a necessity, and even the best efforts won’t quell growing world demand. Chinese oil demand is often cited as a culprit, but China is making efforts for diversity in its energy supply. Of the 74 nuclear reactors under construction worldwide and another 182 planned, China has 23 plants under construction and 54 planned. In the Chinese city of Xi’an there are 20,000 taxis, 3,000 buses and 2,000 special purpose vehicles fueled by CNG (compressed natural gas), with 23 CNG filling stations.

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