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.