U.S. Energy Department Natural Gas Update for May 11 (Text)

Following is the text of the weekly natural gas update as released by the U.S. Department of Energy in Washington D.C.:

Natural gas prices fell across the board as oil prices dropped steeply along with most other major commodities. At the Henry Hub, the natural gas spot price fell 36 cents from $4.59 per million Btu (MMBtu) on Wednesday, May 4, to $4.23 per MMBtu on Wednesday, May 11.

At the New York Mercantile Exchange, the price of the near-month natural gas contract (June 2011) dropped almost 9 percent, falling from $4.577 per MMBtu last Wednesday to $4.181 yesterday.

Working natural gas in storage rose by 70 billion cubic feet (Bcf) to 1,827 Bcf, according to EIA’s Weekly Natural Gas Storage Report.

The natural gas rotary rig count, as reported by Baker Hughes Incorporated on May 6, increased by 8 rigs to 890. Oil rigs, which recently overtook natural gas rigs, also rose by 8 to 934.

Prices

Natural gas wholesale prices dropped by up to 75 cents per MMBtu last week. The decline in natural gas prices coincided with a precipitous drop this week in oil prices; on Thursday, May 5, the West Texas Intermediate crude oil spot price dropped from $108.79 per barrel to settled at $99.89 per barrel. This was the 5th-largest one-day decline ever in the WTI price. Yesterday, the WTI price settled at $97.88 per barrel.

In addition to the general commodity market downturn, decreased demand for space heating due to mild temperatures and warmer weather relative to last week placed downward pressure on natural gas prices. Price declines were largest in the Northeast United States; at the Iroquois Zone 2 trading point the spot price fell from $5.50 per MMBtu last week to $4.75 per MMBtu yesterday. At Transcontinental Pipeline’s Zone 6 pricing point for delivery into New York City, the spot price dropped 53 cents, from $4.99 per MMBtu to $4.46 per MMBtu. Most price declines across the country were between 30 and 45 cents per MMBtu. At the Henry Hub, the natural gas spot price dropped 36 cents on the week, from $4.59 per MMBtu last week to $4.23 yesterday.

This week’s drop in prices is a reversal from a run-up over the past month. At the Henry Hub, prices had steadily increased since the beginning of April, but made a swift reversal after reaching 4.60 per MMBtu last week, the highest price since early February. Despite the run-up that occurred, prices were still moderate. The decline in natural gas prices this week mirrored declines in other commodity prices across the board.

Natural gas consumption fell by 7 percent from last week, while supply fell slightly, according to data from BENTEK Energy. Decreases in residential and commercial demand a reflection of the warm temperatures largely accounted for the overall decline in consumption. However, compared with the same week last year, residential and commercial consumption was about 1 percent higher. Electric power consumption increased by almost 5 percent from last week, likely reflecting cooling demand in areas of the United States where average temperatures reached into the upper 70s. Production was up slightly from last week, and almost 7 percent from the same week last year, but overall supply fell by about .2 percent as Canadian pipeline imports and LNG imports both fell. LNG imports dropped about 20 percent from last week and were down 40 percent from the same week last year. Reflecting continued weakness in LNG imports, this week Southern Union and BG Group filed an application with the U.S. Department of Energy for permission to export domestically produced natural gas from the Lake Charles LNG import terminal in Louisiana.

Spot Prices

The NYMEX price dropped almost 9 percent, falling from $4.577 per MMBtu last Wednesday to $4.181 yesterday. The largest daily decline occurred Thursday, when prices dropped almost 32 cents from their Wednesday close. The 12-month strip (the average price of all of the natural gas futures contracts from June 2011 to May 2012) fell from $4.898 per MMBtu last Wednesday to $4.545 per MMBtu yesterday.

Storage

Working natural gas in storage was 1,827 Bcf as of Friday, May 6, according to EIA’s WNGSR (see Storage Figure http://tonto.eia.doe.gov/oog/info/ngw/storagefig.html). The 70- Bcf net injection was once again smaller than last year and the 5-year average. Stocks continue to run below the 5-year (2006- 2010) average of 1,864 Bcf despite high domestic production. Stocks last year were over 200 Bcf higher at 2,076 Bcf. Most of the shortfall can be found in the East Region which is currently 21 percent below last year and 13 percent below the 5-year average.

This week’s build nearly matched the week before, which saw the largest net builds so far this year in all three regions. The East and West Regions repeated builds from last week of 41 and 7 Bcf, respectively, while the Producing Region saw a slightly smaller 22 Bcf build compared to 24 Bcf last week. Each region injected less than the 5-year average.

Temperatures in the lower 48 States during the week ending May 5 averaged 56.6 degrees, 1.7 degrees cooler than normal and 5.7 degrees colder than last year. According to the National Weather Service’s degree-day data, temperatures were above average in the Northeast, colder in the Midwest, and mixed in the South and West (see Temperature Maps and Data http://tonto.eia.doe.gov/oog/info/ngw/maps.html). Gas weighted heating degree days were 17 percent above normal for the week, but cooling degree days were 15 percent below normal. As national temperatures continue to rise, cooling degree days will begin to have a major impact on natural gas storage figures, as high power demand is often driven by high temperatures during the summertime.

Other Market Trends

Secretary Chu Forms Committee to Evaluate Effects of Fracturing. U.S. Energy Secretary Steven Chu on May 5 announced the formation of a group of environmental, industry, and state regulatory experts who will make recommendations to improve the safety and environmental performance of natural gas hydraulic fracturing from shale formations. Within 90 days of beginning their work, the new advisory committee will report on any immediate steps that can be taken to improve the safety and environmental performance of hydraulic fracturing, a technique that has been widespread in the natural gas industry but has come under scrutiny as drilling in shale formations has increased in recent years. The committee will also develop, within six months, a series of recommendations to the agencies on practices for shale extraction that ensure protection of public health and the environment. Membership of the committee includes: John Deutch, Institute Professor at MIT (Chair); Stephen Holditch, Head of the Department of Petroleum Engineering, Texas A&M University; Fred Krupp, President, Environmental Defense Fund; Kathleen McGinty, Former Secretary of the Pennsylvania Department of Environmental Protection; Susan Tierney, Managing Principal, Analysis Group; Daniel Yergin, Chairman, IHS Cambridge Energy Research Associates; Mark Zoback, Professor of Geophysics, Stanford University.

EIA Forecasts Slower Production Growth in 2011. In EIA’s Short- Term Energy Outlook http://www.eia.doe.gov/steo/ (STEO), released May 10, 2011, EIA forecasts that natural gas marketed production will increase 2.3 percent in 2011, considerably less than the 4.4 percent growth in 2010. The updated forecast incorporates a decrease of 1.1 Bcf per day in marketed natural gas production in February 2011, which was largely due to temporary factors including seasonal maintenance in the Gulf of Mexico and temporarily shut-in production in lower-48 onshore production fields resulting from severe weather. EIA expects production will recover from February levels but begin modest month-to-month declines that could continue through the year because of reductions in the number of active natural gas drilling rigs. The number of rigs drilling for natural gas, as reported by Baker Hughes Inc., has fallen from 973 in April 2010 to 882 as of April 29, 2011. More rigs are being directed toward oil instead of gas, largely because of the large price disparity between the two fuels on an energy-equivalent basis. (On this basis, crude oil is generating close to three times as much revenue per dekatherm of energy than natural gas.)

Annual average Henry Hub spot prices are also expected to decline slightly in 2011, falling $0.15 per MMBtu to an average of $4.24 per MMBtu in 2011. Total natural gas consumption will remain flat from 2010 to 2011, according to the EIA forecast. Reported residential and commercial consumption levels are expected to decline by 0.7 percent and 1.6 percent, respectively, primarily because of changes to EIA?? methodology for collecting and reporting natural gas consumption data (see Changes in Natural Gas Monthly Consumption Data Collection and the Short- Term Energy Outlook http://www.eia.gov/emeu/steo/pub/special/pdf/2010_sp_04.pdf). Industrial consumption rises from 18.1 Bcf per day in 2010 to 18.4 Bcf per day in 2011, as the natural gas-weighted industrial production index increases during the year.

Natural Gas Transportation Update

Southern Natural Gas Company (SONAT) and Tennessee Gas Pipeline Company (TGP) this week advised shippers of possible service disruptions due to the flooding of the Mississippi River. SONAT said it was monitoring flood levels and their potential impacts on several receipt and delivery meters, as well as compressor stations located within the Army Corps of Engineers forecasted flood zones. SONAT specifically pointed out that flooding could impact operations facilities and points on the North Main System in west central Mississippi as well as in Louisiana upstream of White Castle Compressor Station. Southern expected to shut in Thursday the Crosstex receipt point near Onward, Mississippi. TGP simply informed shippers that it is monitoring the forecasted flood levels and land areas where such flooding would have implications to its facilities. Depending on changes in the forecasted flood levels and the need for the U.S. Army Corps of Engineers to take additional actions, such as operating the Morganza Floodway, certain facilities could be required to be evacuated, shut in, or isolated, according to the pipeline company.

Texas Eastern Transmission Corporation (TETCO) on Wednesday informed shippers that further maintenance and inspections will be required at its compressor station in Lambertville, Pennsylvania. TETCO stated that firm transportation will be restricted from May 20 through 22, with deliveries downstream of Lambertville limited to 250 million cubic feet (MMcf) per day. The specified meters have averaged flows of approximately 650 MMcf per day over the last week, according to BENTEK Energy.

To contact the reporter on this story: Terry Barrett in Washington at tbarrett1@bloomberg.net

To contact the editor responsible for this story: Alex Tanzi at atanzi@bloomberg.net

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