Prices

Price increases occurred at nearly all markets as temperatures fell in the eastern half of the country, boosting demand for natural gas as a space-heating fuel, as well as consumption of natural gas by electric power producers meeting increased requirements for electric-powered heating. During the report week, the price at the Henry Hub increased by $0.12 per MMBtu, or about 3 percent, to $3.82. However, the Henry Hub price reached as high as $4.24 per MMBtu during the report week (on Thursday, October 8), which was the highest closing price since May 13. Elsewhere in the Gulf Producing region, price increases during the week were generally between $0.05 and $0.25 per MMBtu. The price at the Houston Ship Channel in East Texas increased by $0.08 on the week to $3.77 per MMBtu, while the price at Transcontinental Gas Pipe Line (Transco) Station 65 in Northern Louisiana increased by $0.11 to $3.89 per MMBtu.

The cold start to autumn also coincided with positive economic news this week, likely signaling increased demand in the industrial sector. The large-scale reduction in natural gas prices earlier in the year was related to lower industrial demand, which in 2008 accounted for 31 percent of natural gas deliveries to end-users. EIA’s Natural Gas Monthly (September 2009) estimates industrial consumption through July 2009 was 12.4 percent lower compared with year-ago levels. Numerous recent reports indicate manufacturing activity has increased, including the New York Federal Reserve Bank’s October 16 release of Empire State Manufacturing Survey. The survey indicated an index of general business conditions for industrial manufacturers in New York has improved to the highest level in 5 years. Nonetheless, the combined impact of strong domestic production and weak demand through summer 2009 has resulted in an inordinately high amount of natural gas in storage for this time of year (See storage section below).

In the Northeast, prices increased by as much as 13 percent, and the price spread between this region of the country and the producing regions around the Gulf Coast widened considerably. Temperatures in the Northeast during this report week fell into the 40s, likely boosting heating demand and supporting upward price movements. Several points in the Northeast region posted gains of more than $0.40 per MMBtu on the week. For delivery in Zone 6 into New York off Transcontinental Gas Pipeline, the price gained $0.48 to $4.68 per MMBtu. The Northeast’s price premium over Gulf of Mexico region prices typically widens with the advent of colder weather. The difference between the price at Transco Zone 6 and the Henry Hub was $0.86, which is nearly triple the $0.30-premium for much of last month (although not unusual for this time of year). Elsewhere in the Northeast, the price increased $0.41 to $4.64 per MMBtu for delivery to citygates in New England off of Algonquin Gas Transmission Pipeline. The difference between the price at Algonquin and the Henry Hub was $0.82 as of yesterday.

In the west, week-to-week price increases also were considerable in the Northwest, Rockies and California, where colder weather has eased concerns regarding an abundance of supplies and limited options for storage. The price at the Pacific Gas and Electric (PG&E) Citygate in Northern California was the highest price in the country yesterday at $5.04 per MMBtu. Supply from the Rockies to the Northwest and Northern California was limited by maintenance at Northwest Pipeline’s Kemmerer Compressor Station in Wyoming. In addition, a cold spell has moved into the region, bringing average temperatures well below normal from Canada to Northern California. The price for supplies delivered to Sumas, Washington, increased $0.51 to $4.73 per MMBtu. On Kern River Pipeline in Utah (for delivery into California) the price increased $0.22 to $3.83 per MMBtu.

Natural Gas Outlook: Future Prices Decrease Significantly

At the NYMEX, the price of the near-month contract (for November delivery) decreased $0.47, or nearly 10 percent, during the report week to $4.436 per MMBtu. The decrease resulted from sizable declines in each of the last 2 trading days during the report week. The combined price decrease during these two trading sessions was $0.44 per MMBtu, as traders reacted to forecasts of rising temperatures next week. As of yesterday (October 14), the November contract is priced $0.71 cents per MMBtu higher than the monthly expiration price of the October 2009 contract. However, compared with the expiration price of November contracts from the previous 2 years, the difference in price for this year’s November contract is still stark. The November 2008 and November 2007 contracts expired at $6.469 per MMBtu and $7.269 per MMBtu, respectively.

The price of the 12-month strip, which is the average for futures contracts over the next 12 months, decreased by $0.25 to $5.69 per MMBtu since last Wednesday. Beginning with the near-month contract, NYMEX contract prices increase sharply through the end of the year and into the beginning of the new year, with the price difference between the contracts for delivery in November and December the highest at $0.92 per MMBtu. Futures prices for delivery next summer again increase, so that the highest priced contract in the 12-month strip is for next October at $6.192 per MMBtu.

Storage
Working natural gas in storage totaled 3,716 Bcf as of Friday, October 9, 2009, according to EIA’s Weekly Natural Gas Storage Report (see Storage Figure). This level of aggregate storage is a new record high for working gas inventories, marking the third consecutive week storage levels have reached record-highs. New record levels were established in the West and Producing regions, while the East region is only 11 Bcf below its previous 15-year high level of 2,041 Bcf established on November 14, 2008. The historical high for aggregate inventories prior to this fall was 3,565 Bcf, recorded at the end of October 2007. The implied net injection during the report week was 58 Bcf, bringing the current level of supplies in underground storage 474 Bcf or 14.6 percent above the 5-year (2004-2008) average for this time of year. Current stocks exceed last year’s level by 450 Bcf, or 13.8 percent.

The net injection during the comparable week over the past 5 years averaged 64 Bcf, while the net injection for the comparable week last year totaled 81 Bcf. The relatively lower injection was likely a result of heating-related demand during the report week. The U.S. average temperature as the National Weather Service reported was 59.1 degrees, compared with a normal average of 61.0 degrees. The number of heating degree-days (HDDs) was 19 percent higher than normal in the United States as a whole (see Temperature Maps and Data) . In particular, HDDs in the Pacific region were double the average level, while HDDs in the East North Central region were more than 22 percent higher than average.

Other Market Trends
CFTC Seeks Comment on Price Discovery Function of Natural Gas Contracts. The Commodity Futures Trading Commission (CFTC) on October 7 issued a notice of intent to determine if 17 contracts traded on the IntercontinentalExchange (ICE) perform significant price discovery functions. Of the 17 contracts, 13 are natural gas financial basis contracts. The CFTC will undertake its review based on information ICE provides. The Commission noted that an initial evaluation indicated that several of the contracts satisfied multiple criteria for a significant price discovery determination, as the Commodity Exchange Act defines. If contracts are found to perform a significant price discovery determination, ICE must comply with certain regulatory statutes and provisions. The CFTC is seeking comment on the notice of intent. Comments are due no later than 15 days after publication in the Federal Register. More information can be found here: http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5728-09.html

Natural Gas Rig Count Increases to 726. The natural gas rotary rig count rose by 14, or almost 2 percent, to 726 as of Friday, October 9, according to Baker Hughes Incorporated. The rig count has now increased for 4 consecutive weeks, and rigs are at their highest level since May 2008. However, rigs are about 53 percent lower than their levels 1 year ago. Despite being somewhat modest, this week’s increase is the largest weekly increase since the week ending October 31, 2008. Rigs are now about 9 percent higher than their 2009 low of 665, which was recorded on July 17. Horizontal rigs also rose by 19, to 463, which is the highest level since February 20, 2009. In general, changes in the rotary rig count tend to lag changes in the Henry Hub price by at least 6 weeks (see figure below). With colder weather moving in, Henry Hub prices appear to be recovering from recent declines.

Natural Gas Outlook: Future Prices Decrease Significantly