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Market Executive Summary

 

Week of Sep. 11 – Sep. 15, 2006

Natural gas action:

            5.67 -4.98

October gas futures dropped from $5.67 to a low of $4.80 but ended the week at $4.98 per mmbtu.  The November contract dropped ten cents on Friday while the October prices closed up nine cents.  For the first two months to have opposite price movement is somewhat unusual but is probably due to traders feeling that $5.00 is a minimum price for gas at this time.  Hurricane activity did not appear to impact the prices, but the storage report of a build of 108 BCF when it came out on Thursday caused the gas price to plummet and close down almost 56 cents for the day.     

Crude Oil action:

Oil trended lower for the week and dropped from $66.25 to $63.33.  A reduction of $2.92 for a week is unusual but seems to be influenced mainly by the fact that the Middle East cease fire remains intact. 

Natural Gas One Year Strips:

Attached is a graph which shows how important the longer term price action of the last week has been.  It is very unusual for months further into the future to follow the prompt month down as rapidly as they have in the last week.  See the graphic comparisons by month and by strip in the file NGstrip091506.xls.  The two most important price factors this fall will be the impact of hurricane activity and whether we have an unusually cold winter.  I believe there has been important demand destruction in the natural gas market and that high prices are reducing demand.  Hurricane activity has not been fierce to date this season, and whether we have a cold winter is an unknown. 

Hedging Recommendations: 

If you are not locked in for the winter, there is too much risk to go into the winter without locking in winter prices.  Present prices are better than they were last week, but the market tends to trend and the risk of an immediate rise in strip price is not too great.  A hurricane could affect prices but would take some time to undo the last week’s reduction.  The risk of cold weather is first seen in the National Weather Service 2006-2007 Winter Outlook which is due in mid November. 

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Week of Aug. 28 – Sep.1, 2006

Natural gas action:

September gas futures contracts expired on Tuesday August 29 at a closing price of approximately $6.82 per mmbtu which was down from the prior Friday close of $7.16. October prices closed on Friday September 1 at about $5.88. The most likely reason for the reduced prices is the calming of hurricane Ernesto and its shift in the direction away from the gulf gas and oil platforms.

Crude Oil action

October oil action was mainly influenced by political considerations as traders were encouraged by the Middle East cease fire holding. October crude contracts closed Friday at $69.19 which is down from the prior Friday close of $72.51.

2007 Monthly strip price graph should be reviewed to see the long term trend. Typically the long term price reacts more slowly than short term prices. If we were to have short term prices stay below $7 for 6 months then the strip prices would come down significantly. The two most important price factors this fall will be the impact of hurricane activity and whether we have an unusually cold winter. I believe there has been important demand destruction in the natural gas market and that high prices are reducing demand. Hurricane activity has not been fierce to date this season, and whether we have a cold winter is an unknown.

Hedging Recommendations: If you are not locked in for the Winter, there is too much risk to go into the winter without locking in winter prices even at present levels. We may see opportunities to lock in further supply this fall, but present levels are not that encouraging. We will need to wait and watch the market to assess when a good time to hedge next summer and beyond.