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Energy Prices Ease – For Now

June 17th, 2011

OMAHA (Capstone Energy Services) – Natural Gas – Natural gas prices pulled back sharply from last week’s $4.847 per MMbtu 10 month high following the report of last week’s stronger than expected 80 Bcf storage injection. The July contract closed this Wednesday at $4.577, $.27 below last week’s high, and subsequently dropped below $4.50 Thursday after this week’s storage report showed a 69 Bcf injection, in line with analyst expectations.

While prices remain within the recent trading range, the trend over the last few weeks has been gradually upward due to incremental demand caused by early summer heat in the eastern half of the country which has kept storage inventories well below last year and slightly below the five year average. The National Weather Service continues to forecast warmer than normal weather in the eastern U.S. for at least the next two weeks. Offsetting the effect of this higher cooling demand is an expectation that new shale gas production will push storage levels back to near record levels by the end of the storage injection season in November. In addition, new economic reports show U.S. economic growth and industrial production to be faltering this summer. Until there is a clear indication through increased storage injections, that a surplus is building, this gradual upward trend in the trading range will likely continue well into the summer. Furthermore, any significant downward move will be limited because of the risk of hurricane production disruptions and summer cooling demand until later in the summer.

Crude Oil – Crude oil prices dropped this week on a combination of the European financial crisis, another interest rate hike by the Chinese to slow growth and inflation, the slowing U.S. economy and a stronger U.S. Dollar. NYMEX crude dropped below $95 per barrel while Brent crude slipped to $114 per barrel, well below the $120 price earlier in the week. The near record spread between Brent crude and NYMEX crude reflects the divergent market dynamics between Cushing OK, where the NYMEX contracts are physically settled and the North Sea where Brent crude is produced.

Crude oil in Cushing OK is in surplus supply because of excess deliverability into the area from the new Keystone pipeline from Canada. The final leg of that pipeline from Cushing to Gulf Coast refineries continues to await government approval amid legal, environmental and political objections and protests. The result of the Cushing physical supply bottleneck has been for traders and particularly non-commercial investors to look to the Brent crude futures contract as the more representative market for international crude oil. Unfortunately, this speculative shift in investments has caused a rise in Brent crude prices to more than $4.00 per barrel higher than the Gulf and East Coast physical markets, thereby distorting market price signals and creating additional market uncertainty.

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By Ed Freeman

Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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