June 29—The natural gas market has broken out of the four-month (March 2007-June 2007) $7.50-$7.60/MMBtu contract settlement range with the July contract settling at $6.929/MMBtu. July has historically been a relatively low-priced month since typically there is plenty of space to store excess gas and hurricane activity hasn't started. However, from August through October usually gets exciting. During this period prices have a tendency to implode or explode depending upon storage fundamentals and hurricane activity. For example, last year prices "imploded" during September due no significant hurricanes, causing the October settlement price to be a very low $4.20/MMBtu. In fact, that was the lowest settlement price since December 2002. The prior year (remember Rita and Katrina) prices "exploded" during August and September, causing the October settlement price to race up to $13.91/MMBtu—the highest settlement price ever.



What do we expect will happen this year: historic highs or a seven-year low? Based on market fundamentals today, we believe there is a greater likelihood of lower prices than higher prices. For example, storage levels are rising dramatically (18 percent above the five-year average) and may surpass historic high levels by the end of July if temperatures remain moderate. However, market fundamentals can and do change rapidly. We are just entering the hurricane season which many forecasters have predicted will be very intense. A few well-placed storms could impact supply deliverability and drive up prices. Unfortunately, hurricane activity levels and storm tracks are highly uncertain. Due to this uncertainty, the market has factored in a "hurricane premium" that will quickly be wiped out with no damaging storms. On the other hand, if we do have damaging storms, today's prices are just a down payment on where prices will go.

What should you do? If current prices fit your budget, buy some protection in the form of fixed prices. If you are a risk taker, do nothing. If you are concerned about rising prices but also want to participate in further downward price movements, options may be a fit. Good luck!

Casey Whelan, vice president of business development, can be contacted at cwhelan@usenergyservices.com.