Natural Gas Market Continually Responds to Weekly Injection Reports

September 1, 2003

BY Casey Whelan, U.S. Energy Services Inc.

The market continues to search for equilibrium, moving up one week, down the next, up the next, etc. Weekly moves tend to be triggered by the weekly storage inventory report that is released each Thursday. If the injection report is higher than expected, prices move down; if the injection report is lower than expected, prices move up. On balance though, storage injections have been strong over the summer period and the ending inventory level should be in the "reasonable" range by the end of October. Over the last 2½ months, the November 2003-March 2004 natural gas strip price (winter strip) has ranged from $5.15/MMBtu to $5.70/MMBtu. We appear to have stubborn resistance when the strip price approaches $5.70/MMBtu and stubborn support when the strip price approaches $5.15/MMBtu. Commodity markets generally, and the gas market specifically, doesn't trade in a tight range for extended periods. So what will happen? Will prices move above the $5.70/MMBtu level or below the $5.15/MMBtu level? It depends. Will temperatures continue to be moderate, creating relatively high storage injections? Will hurricanes avoid the Gulf of Mexico, keeping all production flowing? Will oil prices moderate, giving an economic alternative to high priced gas for large industrial and electric generation loads and, finally, will energy intensive industry demand remain soft? If all of these outcomes occur, prices will drop. As each of the above factors go the other way, there will be an increasingly likelihood of higher prices as we move toward winter. Once winter arrives, prices will be driven by weather factors throughout the U.S. and associated storage inventory volumes. Longer term - we need continued robust and increasing drilling levels to keep up with increasing demand and natural gas well production declines. EP

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