11-26-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (11/23) energy settlements:
December NYMEX gas closed: $7.70
Winter ’07-’08: $7.92
The NYMEX one-year strip $7.93, 2-year strip $8.17, 3-year $8.24
(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: $98.18, #2 oil $2.70

As gas expired the day after Thanksgiving at $7.70, I was reminded that last year it closed the day before Thanksgiving at $7.70. It’s just another reminder that the trading patterns this year have been very similar. December gas expires this Wednesday and it looks like we will close out slightly lower than the ’07 settlement of $8.318. Keep your triggers in place to buy $7.50 down to $7.25 or accept the expiration price for December gas. Keep the current trading range in mind as you plan future purchases. Over the last 92 trading weeks prices have settled above $8 only 17 times (twice during ’07) and below $5.50 only 12 times (once ’07), with only one monthly settlement above $8 during that period.

After the December contract expiration, the tendency is for gas to rally during mid-December. Please do not make a fear based purchase of future gas during that rally. Last year, the low for Q1 prices arrived on December 28th. I don’t expect that to happen this year, but anything can in this market so it is time to gather the decision makers together and determine what you will do if gas prices come to your longer term buying targets.

As we watch crude oil toy with the $100 mark, it reminds me of the difficulty in trying to set parameters to establish what a fair value should be for any commodity. History has shown us that markets can go far higher than we ever expected and vice versa, far lower than we dreamed. As we approach the Q1 low, it is a time to reassess if you are a budget driven gas buyer or a low cost buyer. Since Katrina and Rita, the fear premium built into future gas prices has made hedging for a year or more an expensive practice that has been rewarded only briefly during the 2nd and 4th quarter run ups. In our southeastern markets, with the exception of the Katrina-Rita timeframe buying interstate basis month to month has always been cheaper than hedging it on an annual basis. So, the deck is stacked against the cautious, while Monday morning quarterbacks proliferate among those who would benchmark the performance of the poor gas buyer.

When I peer into my crystal ball for 2008, I see more domestic production, more LNG supplies, and new pipelines connecting stranded gas to the interstate system. It’s a recipe to become a bear, but something new has been injected into the mix. The combination of a weak dollar and internationally traded LNG filling our marginal supply needs has me concerned. At 8 Euros, gas is worth only $5.37 to Europeans, or better stated, if they are willing to pay 8 Euros, we’ve got to pay $11.92 to match them, and the greenback doesn’t look to get any stronger as we sell more debt to finance the Iraq War. Fortunately, the old European standard of pricing gas in a 6:1 ratio against crude oil is vanishing but no new system has yet emerged. The marketplace will watch with great interest to see if their new pricing standard is based upon associated products such as fertilizer and ammonia. I’ll have more to say on this topic, as well as discussions about where the one-year strip price could trade during the Q1 low.

What does a rise in gasoline prices mean to the US economy? According to “The Economist”, a one cent rise in the price of gasoline equals a $1.2 billion reduction in disposable income and results in a $600 million decline in consumer spending, so the $0.80/gallon premium we are paying over this time last year is a mammoth “tax” on Americans. But, as badly as higher gasoline prices affect our economy, it is less than the impact from tighter credit and falling housing prices. According to the same article, residential housing makes up 1/3 of all household wealth at $21 trillion. A 10% decline in housing prices has a far greater affect on consumer spending that the “oil tax” but together they make another “perfect storm” that we must withstand.

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