9-3-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (8/31) energy settlements:
October NYMEX gas closed: $5.468
Winter ’07-’08: $7.397
The NYMEX one-year strip $7.25, 2-year strip $7.69, 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: $74.04, #2 oil $2.042

Last week was the lowest weekly close since the Amaranth meltdown last September, and last Wednesday’s expiration of the September contract was the lowest monthly expiration since the Amaranth induced fall in the Oct ’06 contract. Prior to that, you have to go back to Sept ’04 to find a lower monthly settlement. The one year strip out of October at $7.25 seems like a relatively cheap way to take the “probably” out of your energy budget. Given that the mid-point of the long standing trading range between $5.50 and $8.00 is $6.75 and the average spot price of the past 12-months is also $6.75, the “insurance premium” in the one-year strip is only $0.50/Dt. Consider buying a slice of the one year strip as insurance.

If your horizons are shorter, the Nov-March winter strip that was $9.80 back in June has tumbled to $7.40, only a $0.24 premium to the ’05-’06 average settlement prices. The Nov-Dec portion at $6.92 is extremely attractive, while the Nov-Jan at $7.22 is your most prudent risk-reward purchase. The Dec-March strip at $7.67 and the Jan-March at $7.77 are less attractive.

The EIA reported storage at 2.969 Tcf last week. With cooler temps ahead, a new record by Nov. 1st at 3.5 Tcf would only require a average weekly injection of 53 Bcf per week; 63 Bcf would take us to 3.6 Tcf and that’s not out of the question.

While gas prices can move lower given the current fundamentals, please remember that pigs get fat and hogs get eaten. This is only the 13th time in the past 81 weeks that natural gas has settled below $5.50. Buy a percentage of your future needs “average down” when these attractive prices are available.

Watching the European energy markets reminds me of Will Rogers’ saying that “Diplomacy is saying nice doggie while looking for a rock.” Europe must import energy. Russia has lots of gas, oil and uranium. Russia’s KGB trained leadership has already shown the willingness to use energy as a bargaining chip to forward its political goals. The European Union is trying to establish new rules for the ownership of power generation and gas and power distribution systems that would thwart Russian efforts to own European energy “downstream” assets. Russia has cried foul and stated it will do everything “legally in its power” to stop the EU’s efforts. Energy is the oxygen supply of the industrialized world and Russia’s energy assets will influence political policy from Europe to Asia for the next generation.

It’s not what you don’t know, as much as what you think you know that’s wrong that can hurt you. A team of Carnegie Mellon University researchers will report in the upcoming journal Environmental Science and Technology that liquefied natural gas (LNG) used for electricity generation could have 35% higher lifecycle greenhouse gas emissions than coal used in advanced power plant technologies.

North America will probably experience a natural gas shortage before any other region of the world. North America has only 4.6% of the world's gas reserves but consumes 30.3% of the world's production, with the US consuming the lion’s share. The proved and probable reserves to production ratio is only 9 years. It is easy to see that present consumption rates cannot be maintained for long without importing large amounts of LNG.

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