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.