NOAA Predicts Late Summer Hurricane-Induced Natural Gas Production Outages of 86 Bcf

This week’s commentary from MXenergy provides an update on natural gas supply and demand. Three weeks into the 2007 hurricane season has produced Subtropical Storm Andrea and Tropical Storm Barry. Chantal will be the next Atlantic storm name. In the record year 2005, Hurricane Cindy, the third storm of that season, hit July 3rd through the 7th.

This week wide-ranging temperatures across the country caused prices to fluctuate as needs for air conditioning arose and receded. Overall mild weather and adequate storage continue to place downward pressure on prices. Inventories could enter the winter at a record high of 3.5 Tcf or greater in the absence of a warmer-than-normal summer and hurricane-related supply disruptions. The National Oceanic and Atmospheric Administration (NOAA) has forecast an active hurricane season again this year with 13 to 17 named storms forming in the Atlantic Basin, including 7 to 10 hurricanes. The outlook includes hurricane induced production outages of 13 million barrels of crude oil and 86 Bcf of natural gas, primarily occurring in August and September.

An update on supply and demand:
Natural gas consumption for the first quarter of 2007 is 10% higher as compared to the same period last year. Demand this summer is projected to be similar to last year, which was much warmer than normal, leading to an annual average increase in consumption of 4%. Growth in consumption is expected to slow to less than 1% in 2008, but if anomalous temperatures spikes occur, gas-fired electric power generators will keep demand up in order to meet peak cooling demand. Natural gas production from the Gulf of Mexico is expected to decline over 7% this year. Onshore production increases are expected to offset the drop in the Gulf, leaving total production flat for this year. Imports of liquefied natural gas (LNG) are expected to reach 35% increase over last year, but pipeline imports on the other hand are projected to decline by 4% as rig activity and production in Canada (primary supplier of natural gas imports into the U.S.) continue to dip.

Bulls & Bears Go Head-to-Head

I had the privilege of hosting MXenergy’s Client Energy Series teleconference last Thursday which featured industry expert Michael S. Haig, Director and Senior Commodity Strategist for Societe Generale. The topic was this summer’s energy outlook which concluded that the Bulls and Bears have been going head to head for control of the US natural gas market due to mixed fundamental indicators.

Predictions of an active hurricane season bolstered this winter’s wholesale price of natural gas. Also, this week, the Energy Information Administration (EIA) released its short term energy outlook which was fundamentally bullish in nature. The report stated that there is a 1.3% probability that more than 100 million barrels of crude oil and 600 Bcf of gas will be disrupted by the storms which is similar to the impact of Katrina and Rita using the “Monte Carlo hurricane outage simulation.”

And unlike last year, they are projecting a 97.8% chance that the offshore Gulf will be affected by storms this hurricane season. On the contrary, Haig noted that since hurricanes Katrina and Rita in 2005, there have been significant technological improvements which have strengthened rigs and pipelines. Thus, gas production is unlikely to be disrupted as severely as it was in 2005 if the offshore Gulf takes several direct hits this year.

The other fundamental factors where sentiments differ are projections of the upcoming summer weather-related demand for gas-fired electricity generation, storage injections and inventories, crude oil prices, domestic production, Canadian and liquefied natural gas imports.

To show the impact of the mixed market, this week’s slight departure of 7 Bcf from the expected storage injection released by the EIA Thursday sent the wholesale natural gas market into a frenzy and prices reached a high of $7.825/MMBtu for the July prompt month, which is about 3%
higher than the previous day settle.

All in a Day's Work

So what do our representatives in British Columbia do all day? I've asked one of our sales representatives, Kendall, to give us a glimpse into his daily work ritual. Kendall is one of many MXenergy representatives that does direct marketing for us in this region. Here’s what Kendall has shared with us:

"Well, what can I say? I'm a door knocker! I've been doing it for many years,
and I don't have any inclination to stop for many more years. It's a way of
life, it's a way to interact with a lot of people on a daily basis, and it's
very easy to do if you have a product or service you really believe in.

Today, it's Monday morning and I'm heading to the MXenergy office
on Granville Street in the outskirts of Vancouver, where I'll be meeting the
rest of the sales team to go over our daily marketing goals. We do this each day
to cover off how many prospects we're hoping to meet and to set out our targets
for how many of these prospects we hope to persuade in becoming MXenergy
customers.

The next thing we do in the office before heading out
to the field is go over any cancellations that may have occurred during the
previous week. I've been doing sales for a long time, and I recognize that it's
inevitable that cancellations will happen; but, they should be few and far
between, and when they do happen, there should be a good reason for
them.

Lucky for us, we've had zero in the last week, and very few
since we've been marketing in this region. This is pretty much the most
meaningful number of the day. It means that we're selling a good service and
that we're selling it tactfully. It also means that our Third Party Verification
system (TPV) is working well.

TPV ensures that our prospects
understand everything we cover during our sales presentation at the door. The
way it works is that a third party company calls the customer after a sale is
made and asks them a number of questions to ensure that they fully understand
what they've signed up for. This is by no means a requirement by law, but it's
good to know that MXenergy is taking its own initiative to protect customers
with this standard. Believe it or not, MXenergy is one of the only gas marketers
in British Columbia that has this system in place.

The next step
in my day is to set out to the field. Today we'll be heading back to a
residential area in the city of Richmond, one of the more populated suburbs of
Vancouver. I will be dropped off with my partner, Kevin (best known by his
teammates for his operatic rendition of Kenny Rogers'
"The Gambler") who will
be working on the opposite side of the street.

Yesterday, Kevin
and I had a very good day in the field, with a lot of the new customers
referring us to other prospects who they thought would especially be interested
in learning about MXenergy's new Earth Friendly Partnership program. The
program, which was first introduced to the British Columbia market by MXenergy,
will offset CO2 emissions through the planting of trees and grasslands in North
America.

This is proving to be a big hit for the environmentally
sensitive residential and commercial customers, which makes our job a whole lot
easier!

Well, I got to hit the field, but next time (provided Jeff
let's me share his space on the blog), I will share with you the type of
conversations we have at the doors with respect to our natural gas offering and
our carbon neutral product, the ups and the downs of knocking on doors all day
long, and all the other interesting things that you would never think an
MXenergy sales representative would have to deal with all within the span of one
day!"

Summer to begin with above normal A/C demand

From MXenergy's pricing and risk teams:

The driver of natural gas prices for this time of the year is clearly warm weather. While normal temperature forecasts drive prices down, tropical storms drive them up. The Midwest and NE have been showing persistent above average temperatures that have helped to support the recent rally. This volatility will continue throughout the season and will set the tone for winter prices. The fact that we've been injecting gas in greater quantities than usual is a significant bearish signal but don't be fooled, a period of cold winter weather for any length of time could wipe out any excess we have in storage. On the other hand a bearish factor in this market is the fact that LNG imports continue at surprisingly high levels, which could offset additional demand caused by hot weather and the need to burn more gas in gas-fired power plants.

Back to the summer overview, NOAA continues to forecast a pretty active hurricane season. We have seen tropical storms create quite a commotion in the market, with the first named storm on the first day of the hurricane season. Prices are being supporting by buyers and speculators reacting to the threat of hurricanes and the prospect of hot weather later this year. Demand for air conditioning is forecasted to be as much as 28% above normal in the Northeast through mid June.

The National Weather Service last month predicted that most of the US will experience warmer-than-average weather from June to August.

So once again we have a highly uncertain outlook, probable price spikes and ever present volatility. Hold on to your seats - a roller coaster ride is in the offing.

Summer Energy Outlook

The latest update from MXenergy's pricing desk:

Summer 2007 officially begins on June 21, but the Northeast has already experienced a mini heat wave. If the last eight days in May are any indication of the upcoming season, gas-fired electricity generation will be in high demand.

A recent report published by the Canadian National Energy Board indicated that North American gas supplies should be relatively stable this summer which will help stabilize gas prices. Until we get into the reality phase of the summer, exceptions such as hot weather and hurricane-induced supply disruptions will not be reflected in the price of natural gas. However, according to Weather 2000, a private weather forecaster, the last eight days of May will be recorded as the hottest for that period in New York and the Northeast since 1991. It is likely that this mini heat wave has increased demand for gas-fired electricity generation for cooling.

The storage build for the week ending May 25 was 107 Bcf putting the balance at 2.053 Tcf (21% above the five-year average but 8% below this time last year). On the electricity front, a study released Tuesday by the New York Retail Energy Supply Association shows deregulation has put downward pressure in prices with New York having the highest electricity costs in continental U.S. After adjusting for inflation, New York electricity costs have decreased by 9 percent from their pre-deregulation peak in 1994, and prices have been rising slower in deregulated markets than the regulated. Rising fuel prices in the last five years, especially for natural gas, has been a major component of increased electricity rates. Despite these price increases, customers have saved $1.3 billion in New York, New Jersey, Pennsylvania and Maryland over the last ten years.