11-12-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (11/9) energy settlements:
December NYMEX gas closed: $7.897
Winter ’07-’08: $8.18
The NYMEX one-year strip $8.14, 2-year strip $8.33, 3-year $8.34
(Bid and Ask for these strips vary greatly)
Last 12-month average NYMEX: $6.953, Last Summer: $6.79
Last winter: $7.16
Crude oil: $96.32, #2 oil $2.618

We finished the injection season with an all-time record high of 3.545 Tcf. Coincidentally, the EIA added to the good news last week by reporting that U.S. natural gas proved reserves increased 3% in 2006 to the highest level since 1976, the eighth year in a row that reserves have increased, while crude reserves declined 4 %.

The seasonal tendency for natural gas is for the December contract to rally in mid-November and then to fall about 15% from the top of that rally into a Thanksgiving holiday decline. Since this year is paralleling ’06 so closely, I am looking for the same price action and advise you to maintain your triggers to buy additional December gas in the $7.25-$7.50 range or to wait on contract expiration. The January gas contract always rallies in mid-December but I’d avoid buying any of it until expiration. Jan. ’07 expired at $5.838, almost $3 lower than the current price for Jan ‘08.

With crude oil setting new all-time highs each week, alternative fuels get plenty of press. Recognizing the futility of corn based ethanol, Shell is helping to grubstake Range Fuels in a project to make ethanol from pine tree pulp, with optimism that commercial production could come in as little as 5 years. Meanwhile, BP is hoping butanol, the longer carbon chain alcohol, can be commercially produced sooner than cellulose ethanol. Butanol can overcome some of the drawbacks of ethanol such as limited mileage, water attraction and limited blending in standard vehicles. The dilemma facing ethanol is called the E-10 wall. The properties of butanol allow you to blend it with gasoline up to 18% and to transport it through pipelines. It has 88% of the mileage of gasoline, compared to less than 70% for ethanol. Butanol is still in the early development phase.

A charge on carbon generation will most likely be part of our energy future. The calculus of credits is based on the cost per ton of CO2. At $20 to $30 a ton, the 1.9 lbs of CO2 emitted to produce a kilowatt-hour of electricity from a coal plant costs 2 to 3 cents. Wind power would be comparably price with coal at a $25/ton carbon charge. Nuclear power makes sense at a negligible carbon cost. The source of biofuels will even be considered. Ethanol carries a different carbon footprint if made from corn instead of cellulose. If you’d like to get a feel for how to calculate carbon costs, visit www.Terrapass.com or www.Carbonfund.org

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