Sept. 4—The natural gas market is on pace to close out the summer season with record-high storage inventory levels. Current inventory levels are 2.5 percent above last year's record levels and 12 percent above the five-year average. Natural gas price trends over the summer have certainly reflected strong inventory levels with prompt-month prices dropping from over $8/MMBtu early in the summer ($8.20/MMBtu on June 4, 2007) to under $5.50/MMBtu in the late summer.

Cash prices over the summer have been even weaker. For example, the cash index for September in the Rockies was barely over $2/MMBtu, and daily prices in the region have dropped below $1/MMBtu a few times. As long as cash prices remain weak it will be tough for futures prices to rally significantly, at least in the near term.



In the long term, prices may rally as summer ends, temperatures drop and demand picks up. It's tempting to expect prices to remain low since storage inventories are so high. However, it's important to note that the current high storage inventory level is due to relatively high liquefied natural gas import levels, high storage inventories at the beginning of the summer, and relatively low electric generation demand in the East, Southeast and South—not to strong underlying supply/demand fundamentals. Once summer is over and the market looks forward to fall and winter it won't take much cold weather (or the perception of cold weather) for the market to move back up. This is precisely what happened last year. On Sept. 29, 2006, the market bottomed out at $4.20/MMBtu. By Oct. 26, 2006, market prices shot up to $7.70/MMBtu an 80 percent increase. This year could be a repeat of last year.

What should you do? Winter 2007-'08 prices are as low as they have been in more than two years. If price certainty is important to your organization, now may be good time to layer in partial hedges to cover at least through January 2008.

Casey Whelan, vice president of business development, can be contacted at cwhelan@usenergyservices.com.