As of June 7th, the following fundamental(s) are bullish:

• Power Generation
  • EIA projects 3.8% increase in NG consumption, driven by higher usage among utilities and industrial consumers
  • Structural shift has taken place in the power market, providing gas-fired generation a larger position in the power supply stack
  • Coal fired generation giving way to NG fueled generation, cleaner burning fuel

• Industrial Demand
  • EIA’s natural-gas-weighted industrial production index (a measure of industrial activity in natural-gas-intensive industries) showed a year-over-year increase of 6.8 percent during the first quarter of 2010 and is forecast to rise by 5 percent on average for the entire year
  • All else equal, further gains in industrial demand and power generation demand will slow or halt further declines in natural gas/electricity prices

• Weather
  • Above-normal temperatures in the eastern and central U.S. over the next few weeks are expected to bolster demand for NG to generate electricity cooling
  • Active 2010 Atlantic hurricane season expected due to dissipation of El Nino, an abnormal warming of surface ocean waters in the eastern tropical Pacific that causes a change in global weather patterns
  • National Oceanic and Atmospheric Administration (NOAA) outlook points to a 70% probability of 14 to 23 named storms, including 8 to 14 hurricanes and 3 to 7 major hurricanes
  • U.S. Gulf produces about 11% of total domestic NG output

The following fundamentals are neutral:

• Canadian Imports
  • Imports to remain depressed due to decreased Canadian production
  • Drilling most likely to pick up when NG reaches $5.00/mmBtu level
  • Currently at 10 year lows

• Technical Outlook
  • Prices broke out below the $5.00 resistance level in mid-February and have held there ever since, has been trading between $3.81 and $4.50 since March 18, 2010
  • Prices cannot hold under the $4.00 level, even as speculators increased their net short position this past April to the highest level in the past decade
  • Speculators have remained net short 140k to 205k contracts since June 2009

• LNG Imports
  • Not expected to increase substantially because of South American and Asian demand and higher value in UK/Euro zone
  • EIA projects only a .4 bcf/day increase in imports Y-o-Y
  • LNG now makes up 10% of global NG supply, enables greater price competition

The following fundamentals are bearish:

• NG Storage
  • As of June 3rd storage report, supply levels at 2.357 trillion cubic feet, 14.9% above the 5 year average
  • Gas surplus puts pressure on prices by easing concerns over short-lived supply interruptions or demand spikes

• US Production
  • Total US gas drilling rig counts have increased by 210 since the end of 2009, at 967 rigs as of May 28, 28% increase Y-o-Y
  • Shale Gas Production
    • Unconventional gas formations located in shale rock formations
    • Rely on horizontal drilling and “fracking” (pumping water/sand into well to blast out gas), new technology means gas above $4.00/MMBtu covers cost of drilling existing wells
    • Better bet than oil – typical gas well costs $4 million and is virtually assured of success.  In Gulf of Mexico, oil companies spend $300 million to drill deep-water wells and still come up empty
    • According to EIA, shale gas is largest source of growth in NG supply
    • Potential to supply 40% of total U.S. NG production
    • Driven by nation’s growing need for energy and high NG prices in recent years, interest in shale gas has been ever increasing
    • When NG reached a high of about $16/ MMBtu in late 2005 and $14/MMBtu in July 2008, there was a massive influx of lease purchases which drove companies with cash into a bidding frenzy
    • Despite NG prices falling 75% since then, those companies are forced to continue drilling plans formulated for much higher market prices in order to protect their lease investments, even though the domestic market does not need all of this NG right now
    • If a well is not drilled on a new lease within 3 to 5 years, then control of the mineral rights reverts to the owner, the lease is void, and the company loses their investment
    • Companies stuck between having to continue to supply the market to keep their lease and protect their investment and hammering their own market by over-supplying at a time of minimal demand and a slow economic recovery

Additional Geopolitical Factors Affecting Prices:

• Chakib Khelil, Algeria’s energy minister and president of the Gas Exporting Countries Forum (which does not include USA or Australia, holds over 70% of world’s current proven NG reserves), had said it may emulate OPEC, which typically shuts the spigots to boost prices
• Announced on 4/19/10 that production cuts have been ruled out by risk of losing market share to countries like USA and Australia
• Production cuts were already denounced by 2 of the forum’s heavyweights, Qatar and Russia, who are both increasing market reach

Additional Environmental Factors Affecting Prices:

• Offshore natural gas production was not directly affected by the oil spill in the Gulf of Mexico and related recovery efforts
• About 6 million cubic feet per day of offshore production shut-ins, comprising less than 0.1 percent of total natural gas production in the Gulf

Additional Regulatory Risks Affecting Prices:

• Oil Spill and Shale Gas
  • New regulatory risks and uncertainty following the oil spill in the Gulf of Mexico are making on-shore production more attractive
  • The spill could be a boon for domestic shale gas as the U.S. looks to reduce its dependence on foreign oil while easing the burden on the inherently higher risk of deepwater drilling in the Gulf
  • Natural Gas offers a cleaner, lower-risk solution to nation’s energy demand
• Energy Bill
  • President Barack Obama vowed to find votes to pass an energy bill in “the coming months” after the Gulf Oil catastrophe
  • Plans to advocate rolling back billions of dollars in tax breaks to oil companies and expanding the nation’s fleet of nuclear power plants and tapping into natural gas reserves

In summary, there are factors pulling prices in both directions.  Traders are weighing weather driven demand and the hurricane forecast against the abundant storage numbers and US production.  The surplus of gas in underground storage as well as the continued shale gas drilling should keep a cap on major price increases in the near term.

Front Month NYMEX Natural Gas Vs. Zone J LMP:

DISCLAIMER:  Past performance is not indicative of future results.  Electric prices are not 100% correlated to natural gas prices.  Geopolitical, economic, and weather related supply and demand spikes can significantly affect natural gas and electricity prices.