10-1-07 Energy Update

WEEKLY ENERGY MARKET UPDATE

Friday (9/28) energy settlements:
November NYMEX gas closed: $6.87
Winter ’07-’08: $7.76
The NYMEX one-year strip $7.75, 2-year strip $8.00, 3-year $8.05
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.943, Last Summer: $6.33
Last winter: $7.16
September Crude oil: $81.66, #2 oil $2.225

October gas expired at $6.423, almost a dollar higher than Sept. The increase appeared more driven by financial traders than supply-demand fundamentals as “short Oct./long Nov” spreads had traders scurrying to purchase October contracts on expiration.

Last week’s storage report put us at 3.206 Tcf. During the 6 weeks remaining in the traditional injection season we only need to average 65 Bcf per week to reach the previously unthinkable total of 3.6 Tcf in the ground ahead of winter. Long range forecasts project a mild November nationwide which will lengthen the injection season. Everything about the fundamentals would make one think that gas should be $5.00. And, when I put on my technical analyst’s hat, the November chart doesn’t look bullish. But, at this time of year, the market acts counter intuitively. When storage gets full, gas prices go up. Natural gas rallies every October. November gas has expired higher than October every year in this decade. In 10 of the past 16 years, the Q4 high has been in October or November, so you can’t bet against tradition.

Throughout the history of the NYMEX, the average increase from the lowest intraday Q3 price to the highest intraday Q4 price has been 111%. With high storage levels and greater domestic production than a year ago, most pundits logically predict less volatility this winter. The private weather forecaster, WSI Corporation predicts the next two months will be warmer than normal across most of the US, but December will bring below-normal temperatures to the heavily populated Northeast and North Central regions (based on La Nina trends). Maybe that will be the catalyst for the rally, but I agree with the majority this time because colder temps confined regionally won’t be enough to offset ample gas supplies, especially if the nuclear power fleet remains at nearly full capacity.

November gas should decline to at least the October expiration price so set trigger to buy additional supplies when Nov. trades from $6.43 to $6.25. Keep some powder dry to purchase longer term strips during the Q1 low.

In the news: The Chinese have a deal with Cuba to explore oil reserves almost within sight of Key West, Florida, while Venezuela, which controls the largest oil reserves in the Western Hemisphere is making deals with China to sell them oil that is currently coming to the US. The Chinese plan to slant drill off the Cuban coast near the Florida Straits, which would tap into U.S. oil reserves that are estimated at 4 to 9 billion barrels. Of course, we won’t drill them because of Florida’s anti-drilling lobby. For comparison, 4 to 10 billion barrels are believed to be beneath the Alaska National Wildlife Refuge, where the future of drilling is also held up in Congress.

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