10-8-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (10/5) energy settlements:
November NYMEX gas closed: $7.073
Winter ’07-’08: $7.89
The NYMEX one-year strip $7.86, 2-year strip $8.08, 3-year $8.10
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.943, Last Summer: $6.33
Last winter: $7.16
Crude oil: $81.22, #2 oil $2.223

Continued warm temps 15 degrees above the norm in the eastern US combined with scheduled maintenance for 16 nuclear power plants increased natural gas usage for power generation and reduced gas storage injections. To give that perspective, 4.1 Bcf of gas was required to replace 16,336 Mw of nuclear power on Friday out of a total of 25.5 Bcf used for power generation. Total US production on Friday was estimated at 51.7 Bcf while total US gas receipts including imports was 61 Bcf. Injections for the week ending 9/28 were 57 Bcf, with a comfortable total of 3.263 Tcf in storage.

Gas production in the Rockies is down, but producers shouldn’t be castigated for taking gas off the market to support prices. The reality of gas production is that mechanical problems occur to wells regularly. When gas prices are high, producers rush to get them back on line. When prices are less than desired, producers wait until there are enough wells down to spread out the large set up costs for a rework rig. With Colorado prices south of $3 most days, there is no rush to “overpay” to get sickly wells back on line.

LNG deliveries are also down as Asian purchasers take advantage of a cheap dollar to outbid US sites for cargos. Since we can’t meet demand without LNG, the devalued greenback may be a harbinger of higher Q4 gas prices as cold weather finally arrives.

The gap in the daily continuation chart between $6.74 and $6.47 is a good place to be a buyer of Nov gas. Otherwise, nat gas remains range bound between $5.50 and $8.00, so think twice before you lock in prices near the top of that range. It has proven to be costly insurance over the past 85 weeks.

On an upbeat note, production from the Independence Hub in 8,000 feet of water in the Gulf has reached 0.44 Bcf/d, and it is expected to reach 1 Bcf/d by year’s end.

South Korea’s Daewoo Shipbuilding and Marine Engineering Co. Ltd. have started construction of Transocean's Discoverer Americas drillship, the second of Transocean's four enhanced Enterprise-class drillships. Contracted to Hydro of Norway for operations in the US Gulf of Mexico, the ultra deepwater drillship is designed to operate in water depths to 12,000 ft and to drill wells to a depth of 40,000 ft. Meanwhile, GlobalSantaFe Corp. has $740 million in orders for ultra deepwater drillships for delivery in late 2010. They will be able to drill in 12,000 ft of water.

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