Energy Matters: Storms Spare the Gulf
Your Energy Manager
Topic: Storms Spare the Gulf
August 2007
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Independent Energy Consultants, is committed to helping its clients make well-informed and cost-effective decisions regarding their energy supply and consumption. We are sending you this newsletter to help you understand how energy decisions that are made, or not made, effect your company's bottom line.

On August 8, 2007 early word of Tropical Storm Erin and what would eventually become Hurricane Dean began to attract the attention of energy traders. Within a week prices on the NYMEX Futures market shot up over 15%. With media outlets and weather services making this the lead story, an already skittish market had all the signs of taking off. Fortunately on a Sunday evening (8/19) most forecasting models began to show Dean heading southwest through the Gulf and sparing the U.S. oil and natural gas platforms. By the time casual observers returned to work on Monday morning the market had given back all of its gains and then some. Since then the market has been in a downward spiral. It appears traders are starting to part with some of the risk premium built into prices. The 2007 hurricane season, now halfway complete, is shaping up like the 2006 season - dire forecasts, but no damaging storms hitting production facilities in the Gulf.
As soon as Erin and Dean left town, the oil and natural gas platforms in the Gulf were re-staffed and traders appeared to lose faith in the weather service predictions of a destructive season. To help put this into perspective consider the following statistics.

  • The September 2007 Natural Gas futures contract which traded up to $7.20/MMBtu as the storms approached, has since dipped to as low as $5.19/MMBtu
  • That set a new year-to-date low for any month's futures contract,
  • That set an 11-month low for any contract,
  • This traded at the second lowest value in two years - the October 2006 contract expired at $4.20 and was the only one lower,
  • The January, February and March 2008 contracts broke below the $8 barrier for the first time since June 2005, and
  • Technical indicators remain strongly bearish.
So with all this good news, is now the time to buy natural gas? As you might suspect, we must qualify our reply to that question. This certainly would not be the worst time to buy gas, but indicators are pointing toward lower prices. The real answer lies in your company's unique circumstances. If you already have a purchasing strategy in place with sound decision rules, this is likely a good time to purchase your short- term needs and hedge at least a portion of your winter gas. Here are a few indicators, however, that point to the possibility of even lower prices in the near term.
  1. Weather forecasts are calling for cooler than normal temperatures over the next two weeks. That should put downward pressure on the natural gas cash markets and near-term futures contracts.
  2. We are nearing the end of the air-conditioning season in much of the country. This minimizes the risk of a prolonged heat wave and will enable electric producers to idle gas-fired units that are used to meet peak summer demand.
  3. Natural gas storage inventories are ~ 85% full and well ahead of pace to reach industry target of 3 trillion cubic feet by the start of the heating season that begins in November.
  4. As expected, the prompt and near months continue to drop fastest and farthest. Winter months are beginning to give up some of their risk premium, but grudgingly. The January-September spread remains a whopping $2.50. We would like to see this spread much closer to $1 before committing to 100% of our winter gas.

Contact Independent Energy Consultants if you would like assistance in putting together a sound energy procurement strategy that employs risk management and the technology needed to obtain the lowest-cost offers.

Contact us for your energy management needs.


Independent Energy Consultants

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