9-10-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (9/7) energy settlements:
October NYMEX gas closed: $5.501
Winter ’07-’08: $7.353
The NYMEX one-year strip $7.22, 2-year strip $7.67, 3-year $7.81
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.758, Last Summer: $6.33
Last winter: $7.16
September Crude oil: $76.70, #2 oil $2.143

This week I know what it’s like to be a weatherman in San Diego. All he gets to say is, “Tomorrow will be clear and 72 degrees, just like yesterday and today.” Then he talks about everybody else’s weather. There is nothing new to say about natural gas this week that wasn’t said last week. October gas, the winter strip and one, two and three year strips all closed the week within a few cents of last week and at or near lows for the year. If you have no future hedges in place, you need to buy some gas now. If you can afford to be a little greedy, wait a little longer as I think it will trade lower by Labor Day.

Total working gas in storage reached 3.0 Tcf earlier than ever before and with 9 weeks left in the traditional injection season; a new all-time record seems inevitable. More good news for gas consumers lies in 2007 Canadian production statistics. In the 4th Q of ’06, I reported that Canadian gas exports to the US would likely decline in ‘07 as Canadian drilling rates had declined at the same time gas demand for the Athabasca tar sands was increasing. But, Canadian gas production volumes have been larger than expected during the first half of ’07 due to the unexpected resilience of the Western Canada Sedimentary Basin. Bottom line; Canadian production has declined overall only 1% from ’06 levels, and exports to the US in the first 6 months of ‘07 are basically the same as ‘06 even though drilling footage is off by 28% vs. the ’06 pace. But, with no evidence that drilling will pick up in the near future our luck won’t hold out in ’08. Ample Canadian supplies and additional LNG production coupled with no significant lost production days to Gulf storms has helped create a mini gas glut, and this buying opportunity.

Even as Canadian production experiences natural declines, the US supply picture should remain rosy through 2008 as LNG supplies increase worldwide by 25% next year. US imports are expected to increase about 40% as a result. Worldwide liquefaction capacity should increase to about 27 Bcf/d by the end of ‘07 and to 34 Bcf/d by end of ’08. Global gas demand growth is estimated at about 3% annually, so the 7 Bcf/d increase in supply will go to the US market when it cannot be used elsewhere because we have the best developed storage system in the world to absorb the overhang in supply that occurs seasonally.

While natural gas prices fall, crude oil is about to re-test all-time highs, as crude continues on the bullish trend that began in January. As I look for a fundamental explanation, one idea keeps reoccurring to me. In addition to increased Chinese and Indian demand, the top ten exporting nations are also using more oil at home for their rising populations and growing number of automobiles. Chronically high crude prices may be the results of the marketplace discounting this trend of reduced exportation capability.

Looking ahead, over the next few months the Nuclear Regulatory Commission (NRC) expects to receive 12 applications to build new nuclear-power reactors. Applications for another 15 are expected next year. These will be the first new nuclear plants in America in 30 years. The next generation of nuclear plants will be simpler and safer than existing plants. That should make it easier to obtain operating permits, and help to get them built faster and run cheaper. While we slowly move back on the nuclear energy track, India’s nuclear energy ambitions have hit a major roadblock due to a shortage of indigenous uranium, threatening new capacity additions. According to India’s government statistics, uranium reserves in the country can sustain 10,000 Mw of capacity. The current capacity of the country is a little over 4,000 Mw. This will force India to further seek LNG and oil to meet power needs. It’s no wonder that we’re in a secular bull market for energy for at least a generation.

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