October 26, 2009

Record Natural Gas Inventories Pull Natural Gas Down

We have been writing about the impact of Pennsylvania Shale production as potentially having an impact in the future. The potential is here and now. According to Bloomberg.com, CNX Gas and Range Resources reported record outputs from their Pennsylvania properties. CNX plans to produce 92 BCF this year, up from guidance of 89 BCF; Chesapeake Energy is predicting nationwide production of as much as 895 BCF for the year, up from guidance of 875 BCF. Chesapeake is active in the Marcellus and Southern shale fields. (Bloomberg.com, Oct. 22, 2009)

Unconventional natural gas structures are exceeding production expectations which has helped fill inventory and reduce demand despite a 51% decline in rigs. The US natural gas industry is a prime example of doing more with less. The result is an inventory level that is at record highs, which should be a factor in keeping prices anchored.

Working gas in storage was 3,734 Bcf as of Friday, October 16, 2009, according to EIA estimates. This represents a net increase of 18 Bcf from the previous week. Stocks were 397 Bcf higher than last year at this time and 432 Bcf above the 5-year average of 3,302 Bcf.
 

Will Energy Demand Increase with Improved GDP numbers?

Economists are becoming more upbeat about the recovery. Businessweeks' Jim Cooper presented an analysis for healthy growth in this week's Business Outlook. He notes: " The median forecast of 18 economists surveyed by Bloomberg expects a gain 3.1%, the strongest in two years." He also commented that consumer spending, which has been a laggard, rose to almost a 3% annual rate, "...which is the best in 2 and a half years".

So far, the economy has not been able to increase industrial energy demand, which is down 12% for the year, but Cooper warns that with inventory depleted, employment will rise because productivity levels are maxed out at 6%. If Mr. Cooper is on the right track, it would not be surprising to see energy demand increase in the first two quarters of 2010, which could increase producer prices for natural gas and electricity. (Businessweek, Nov. 2, 2009)

The question that is on the minds of energy managers is should they fix or float? As John Burt commented in our Sept. 14 EnergyNews, "There is a good case for riding the current market, and a good argument for hedging long term. It truly depends on your company's business objectives."

Psychology matters also. The psychological problem of floating in a long term contango market is that we can be lulled by the perception of low prices over a short-term horizon of a few months, when prices are actually increasing dramatically further into the future. In essence, we are similar to a frog in a pot of water that is slowly reaching a boil. Everything seems OK until you're cooked.

That's why, as a rule, Power Management encourages customers to lock in a portion of their future natural gas and electricity consumption so that at least they will have a hedge to the downside if prices should take off.

Another risk factor to consider is the failure of the government to curb derivative trading, or even to minimally control it through the Commodity Futures Trading Commission. Many energy analysts cite energy derivatives as the prime suspect for the energy boom of 2006-2008. So long as natural gas is easy to securitize and manipulate, the likelihood of speculation and abuse in the future is much higher.

Natural Gas Market Watch-
Prices have declined over $0.29 this morning as a glut of natural gas in inventory has taken the air out the natural gas prices.
Here are the intraday prices on the NYMEX electronic market today (Monday) at about 11:45 AM for the next six months($ per mmbtu, intraday prices):

Nov. 2009 $4.495 -0.292
Dec. 2009 $5.230 -0.254
Jan. 2010 $5.507 -0.238
Feb. 2010 $5.639 -0.230
Mar. 2010 $5.596 -0.216
Apr. 2010 $5.570 -0.206

Natural Gas Futures:
PMC 30-Day Natural Gas Futures Chart

Crude Oil Watch
West Texas Cushing traded down $1.84 to $78.21 per bbl today at 12:04 AM.
NYMEX Crude front month future is down $1.89 to $78.61.41 per bbl at 12:14 AM today.
 OPEC Basket Data
 
Electricity Watch-
Northeastern electricity prices are ranging from $42.00 per MWH to $55.00 per MWH this morning.
For more information view the Day Ahead Electric pricing data charts from the PMC database, updated every Monday.
 
Weather Trends- Summer Chill Ahead
The Northeastern US will be unseasonably cooler over the next three weeks.
NOAA Forecast for Next Week
8-14 Day forecast
NOAA Forecast- 30-Days

Written and Researched by Martin Linskey; Energy Charts developed by Charles Myers.

Disclaimer: This information is provided for the use of our customers and potential customers. Power Management Company assumes no responsibility or liability for the accuracy or completeness of pricing or information in this document. Historical data was obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness. It is not intended to provide advice or recommendation. Views are subject to change without notice.