9-24-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (9/21) energy settlements:
October NYMEX gas closed: $6.08
Winter ’07-’08: $7.85
The NYMEX one-year strip $7.64, 2-year strip $7.97, 3-year $8.05
(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: $81.62, #2 oil $2.256

Gas prices drifted lower last week in time for the October contract expiration this Wednesday. About 3.4 Bcf/d was shut-in in the Gulf of Mexico in preparation for the almost-storm Jerry, but LNG jumped up slightly to 1.9 Bcf/d, and Canadian imports increased by 0.8 Bcf/d to help offset some of the Gulf reductions. Storage injections for last week are expected to be 57 to 60 Bcf which keeps us on track for a new all-time record that will approach 3.6 Tcf.

Be prepared to add to gas needs through January over the next two weeks. Conservative buyers should purchase the term at the expiration of the October contract, but history shows that November prices will decline in the first half of October before the winter rally begins. The 4th quarters always produce a run up in gas prices and although November gas has expired lower than October 4 times in the past 16 years, it has never expired lower since 2000. The Q4 high historically doubles the Q3 low, which is $5.23.

Then keep plenty of powder dry to buy ahead during the Q1 ‘08 low. Early predictions are for a mild, La Nina winter which will depress gas prices in Q1 if it proves true.

Gas supplies look abundant currently and through 2009, but there is a disturbing trend of drilling rigs leaving the Gulf of Mexico because rig owners can get longer contracts for more money in places like the west coast of Africa, Brazil and the Middle East. The number of rigs in the GOM has declined by 19 since this time last year; down to a total of 72. At this time in 1997, the count was 122, according to Baker Hughes. GOM production decline rates are among the most severe in this hemisphere so any slowdown in drilling will cause a steep decline in production in the coming years. We’ll have to fill that gap with LNG and my research shows LNG supplies from the world’s largest gas fields topping out in 2015.

Crude oil continued to smash records as everyone from retired former Exxon CEO Larry Raymond to the research team at Goldman Sachs talked about an impending oil shortage. Raymond cited the industry’s multi-trillion dollar investment needs along with a shortage of technically savvy oil engineers. Goldman spoke to water and labor bottlenecks preventing significant increases in the production of Canadian tar sands, the nationalization of some oil and gas assets which leads to reduced output and no further foreign input of capital, Biofuels’ inflationary effect on both oil and food prices, and technical problems at Gas-to-Liquids plants that could take GTL off the table with less than $70 oil. Both expressed the need to moderate demand. I guess the way I’d put this is that there is no shortage of oil, there is just a shortage of oil at low prices. Since the 1960s, two barrels of oil have been consumed for every barrel found, while alternative energy is going nowhere. For example, wind and solar power will only supply about 1% of global energy demand by 2030. That means that fossil fuels will remain the dominant energy source in this century. But, don’t run for the exits just yet. Scarcity has a history of being followed by gluts in the oil industry. The secular bull market in energy means that the future lows will be higher lows, but there will still be periodic downtrends in the price of oil and products, and don’t be surprised if a weak dollar isn’t exacerbating this run up more than impending gasoline lines.

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