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---------------------- Forwarded by Jeffrey A Shankman/HOU/ECT on 10/17/200= 0=20 08:04 AM --------------------------- =20 =09 =09 =09From: Doug Leach 10/17/2000 06:44 AM =09 To: Jeffrey A Shankman/HOU/ECT@ECT cc: John L Nowlan/HOU/ECT@ECT=20 Subject: Monthly Briefing: Turning on the Heat - CERA Alert ---------------------- Forwarded by Doug Leach/HOU/ECT on 10/17/2000 06:43 = AM=20 --------------------------- webmaster@cera.com on 10/16/2000 10:04:33 PM To: Doug.Leach@enron.com cc: =20 Subject: Monthly Briefing: Turning on the Heat - CERA Alert ********************************************************************** CERA Alert: Sent Mon, October 16, 2000 ********************************************************************** Title: Monthly Briefing: Turning on the Heat Author: N. American Gas Team E-Mail Category: Alert Product Line: North American Gas , URL: http://www.cera.com/cfm/track/eprofile.cfm?u=3D4487&;m=3D1390 , Alternative URL:=20 http://www.cera.com/client/nag/alt/101600_16/nag_alt_101600_16_ab.html ********************************************************* The nervousness driving the gas market that had settled just below the=20 surface during the relative calm of late September and early October reemerged in force la= st=20 week. From mid-September through early October it appeared that a lucky combinati= on=20 of mild weather, storage injections above 10 billion cubic feet (Bcf) per day,= =20 and a lack of storms in producing areas of the Gulf of Mexico had calmed the market somewhat. Henry Hub prices settled near $5.00 in the cash market, less than= =20 $0.20 above residual fuel oil. Last week, however, tragedy in the Middle East and= a=20 slightly lower-than-expected storage injection report were sufficient to drive Novem= ber Henry Hub prices up by more than $0.50 in two days, to above $5.60. Mild weather may still soften prices from current levels, but CERA does not= =20 expect the relative calm of late September and early October to return to the gas= =20 market. Turmoil in the oil market has raised the floor for gas prices, as nearly 1.= 5=20 Bcf per day of potential gas demand now burning residual fuel oil would quickly return = to=20 the gas market should prices decline relative to oil. Also, weather must remain mil= d=20 through October, or else US working storage inventories may not reach even 2.7=20 trillion cubic feet (Tcf) by the end of the month. The headroom for price is much=20 greater, as distillate oil, the next substitute for gas should gas prices rise, is itse= lf=20 in short supply. Shutdowns of industrial facilities represent an important increment= of demand resistance as gas prices rise, and neither switching to distillate n= or=20 shutting down production comes easily or cheaply. Time is running out before the heating season begins, and the market remain= s justifiably on edge: upward volatility remains much more likely than any=20 significant settling in price. As a result, CERA expects natural gas prices to be=20 sustained in the mid-$5.00s, averaging $5.50 at the Henry Hub during November (see Table 1).= =20 More luck--a great deal more--would be required to restore a measure of calm to= =20 the gas market. Gas Storage--The Final Push October storage injections have varied historically from 4.0 Bcf to=20 approximately 8.5 Bcf per day in the United States, and this year CERA expects them to averag= e=20 5.5 Bcf per day, a moderate level for the month (see Table 2). The reporting of= =20 injections of 62 Bcf during the week ending October 6 precipitated a $0.37 increase in= =20 futures prices, but this rate is actually above average for the first full week of= =20 October. With the beginning of consistent heating load late this month CERA expects a=20 slowing of injections, resulting in an end-of-October inventory of 2,707 Bcf--more tha= n=20 100 Bcf below the previous record low for the end of October. CERA expects that many storage holders--having begun the winter with record= =20 low inventories--will preserve inventories to the extent possible during Novemb= er. However, normal weather this year would drive a substantial rebound in=20 heating load from last year=01,s level and would require added storage withdrawals, whic= h CERA estimates will average 5.0 Bcf per day this year. Withdrawals at that pace,= =20 or even substantially slower (as occurred during 1998 and 1999), will keep=20 inventories on a trajectory to hit record lows by the end of March. Low storage inventories= =20 will remain a major source of price support, requiring that demand continue to b= e=20 priced out of the gas market, and keeping gas prices above those of residual fuel= =20 oil. Regional Markets-Winter Rules The transition to winter pricing relationships is under way, and the start = of=20 winter heating demand in the West has narrowed differentials between the supply-ri= ch Rocky Mountains and the Henry Hub. Local demand for Rockies supply has also eased pressure on San Juan Basin prices, and CERA expects differentials=20 between both regions and the Henry Hub to continue to narrow through November. In t= he Northeast differentials will begin to widen with the onset of winter, with = the magnitude of the differentials depending on early winter weather. The onset= =20 of flows on Alliance will limit increases in the Chicago differential during Novembe= r=20 (see Table 3). CERA=01,=01,s outlook by region follows: * Rockies. Early-season cold has narrowed Rockies to Henry Hub differentials so far this month. Ample supplies within the Rockies will mean volatile pricing relationships through the end of October and early November depending on heating load, but in general strong regional demand will keep differentials well below the ($1.00) per MMBtu summer level. CERA expects a ($0.45) per MMBtu differential to the Henry Hub during November. * San Juan. The increase in local heating demand in the Rockies will continue to ease pressure on San Juan prices by limiting flows south out of the Rockies. San Juan differentials should follow the same relationships as Rockies prices, with general narrowing but continued volatility through November. CERA expects an average San Juan differential of ($0.38) per MMBtu for November. * Permian and Mid-Continent. Tight relationships between the Permian Basin and Mid-Continent and the Henry Hub should continue through November, with some slight widening in the Mid-Continent basis differential expected when Alliance flows commence. CERA expects differentials of ($0.11) per MMBtu and ($0.08) per MMBtu, respectively. * Chicago. The beginning of service via the Alliance Pipeline during November is the focus of most attention in the Chicago citygate market. However, the demand rebound that would result from normal November weather this year would offset most of the added supplies. As a result, Chicago differentials will average in the $0.08-$0.20 per MMBtu range even when Alliance flows commence, although delay of the Vector Pipeline will keep much of the new gas in the Midwest. CERA expects average November Chicago differentials of $0.13 per MMBtu. * Northeast markets. Normal weather would drive a substantial rebound in New York citygate prices from year-earlier levels, but there is little added delivery capacity into that market. CERA expects New York to price $0.66 above the Henry Hub during November, well above the current low o mid-$0.30s. Canadian Markets--Supply Growth Still Uncertain The supply build is uncertain at this time because flows on Alliance are=20 uncertain. A line pack of between 5 and 6 Bcf has been established, and modest flows of= =20 200-300 million cubic feet (MMcf) per day have been initiated to test and commissio= n=20 the pipeline. The start-up is still slated for November 1, but the unknown=20 quantities of gas that are flowing on a day-to-day basis are making it difficult to asses= s=20 precisely the volume of supply being produced. At this time, it appears that October = is=20 on par with 1999. The current expectation is for over 15,500 well completions in= =20 2000, approximately 8,500 of which are expected to be gas wells. Even if the=20 shallow trend does not change substantially, the sheer number of wells is still expected = to=20 produce a supply build by year-end and into 2001. For 2000, the total western suppl= y=20 build is expected to be flat with 1999 to slightly negative, increasing to positive= =20 growth of 350 MMcf per day in 2001. Demand Slow but Exports Up TransCanada flows are still down, averaging about 350 MMcf per day less in October than the year-earlier levels. Storage injections in the East have= =20 accelerated; eastern inventories are expected to be above last year=01,s levels at the e= nd of=20 October. Storage injections in the West, however, have dwindled, revising the expect= ed storage inventories to be even with the five-year average but below 1999=20 levels. PG&E GT-NW volumes have declined in October and are expected to be slightly below 1999 levels by 50-100 MMcf per day in November as well. Northern Bord= er Pipeline is running about 50 MMcf per day above October 1999 but is expecte= d=20 to be slightly below 1999 levels in November. Cooler-than-normal weather has push= ed western Canadian demand up slightly but does not offset the lower eastern= =20 Canadian demand. High Prices, Wide Differentials The AECO-Henry differential has leveled off in the upper US$0.50s to low US$0.60s and is expected to remain in that range through the balance of=20 October. For November the differential is expected to average US$0.50, for a resulti= ng=20 AECO average of C$6.97 per gigajoule (US$5.00 per MMBtu). **end** Follow URL for PDF version of this Monthly Briefing with associated tables. ********************************************************* CERA's Autumn 2000 Roundtable event dates and agendas are now available at= =20 http://www.cera.com/event ********************************************************* ********************************************************************** Account Changes To edit your personal account information, including your e-mail address, etc. go to: http://eprofile.cera.com/cfm/edit/account.cfm This electronic message and attachments, if any, contain information from Cambridge Energy Research Associates, Inc. (CERA) which is confidential and may be privileged. Unauthorized disclosure, copying, distribution or use of the contents of this message or any attachments, in whole or in part, is strictly prohibited. Terms of Use: http://www.cera.com/tos.html Questions/Comments: webmaster@cera.com Copyright 2000. Cambridge Energy Research Associates =20
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