11-5-07 Energy Update

WEEKLY ENERGY MARKET UPDATE:

Friday (11/2) energy settlements:
December NYMEX gas closed: $8.418
Winter ’07-’08: $8.67
The NYMEX one-year strip $8.48, 2-year strip $8.58, 3-year $8.54
(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: $95.93, #2 oil $2.573

For the 17th consecutive year, gas has rallied in the 4th quarter and for the 17th time it comes as a surprise to many of us. Why should gas rally when storage is at an all-time record high of 3.509 Tcf with another injection to report this week, while forecasters are calling for a warmer than normal winter. Remember last year when storage was at an all-time high with a prediction for a warm winter when gas soared to $9.05 from its Q3 low of an Amaranth aided $4.07, a 122% increase before expiring at $8.31? Last week’s high of $8.66 would only be a 66% increase over our Q3 low of $5.23. Throughout the life of the NYMEX, the average rally in the 4th quarter is 109% over the 3rd quarter low. I don’t believe we’ll make the average this year, but more room to the upside should be expected during the traditional run up in November and December. Last week’s close was only the 16th time in the past 90 weeks that gas has settled above $8.

Keep your triggers in place to buy December gas in the $7.25 to $7.50 range or wait until expiration. Last year, January gas expired with a “5” in front of it and I’d discourage anyone from buying it now.

As crude oil rallied above $96/Bbl last week, everyone seemed to have their own Armageddon story. In the past two weeks, the CEO’s of BP, Exxon and Total have explained the great difficulties their industry will face in attempting to reach the 100 million barrel per day production target that many predict the world will consume within the next decade. In fact, Total’s boss flatly said it can’t be attained, noting that we’ve got the reserves but it’s the deliverability that’s the sticking point.

One culprit is national oil companies. They don’t develop reserves with the efficiency of the for-profit industry. Venezuela is a classic example, needing approximately 191 drilling rigs to maintain existing production while only 73 are currently in operation.

Meanwhile, China and India continue to subsidize diesel and gasoline costs. India’s subsidies will cost its government $12.8 B this year. China raised diesel and gasoline prices by 10% to consumers last week but still sells it for less than half the market rate, and diesel is being rationed as domestic refining can’t meet demand. Artificially cheap fuel encourages waste and pollution while creating unfair subsidies for manufactured goods, to say nothing about the illusory financial statements it creates for Chinese and Indian companies whose stocks are soaring on their markets. Both nations say they’d like to eliminate the subsidies some day, but it’s hard to get off that roller coaster at this speed.

In the middle east; I know it’s not about the oil but the Iraqi government pleased Washington last week by cancelling a contract that Russia’s Lukoil held to develop the giant Qurna oil field in southern Iraq, opening the door for US firms to participate. Putin has countered by threatening to rescind a $13 B debt forgiveness deal arranged for Iraq in 2004. For comparison purposes, the US spends that much every two months in Iraq.

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