Washington (Platts)--16Apr2009

Supply and demand fundamentals could not explain the steep natural gas
price increases last summer, when Henry Hub spot prices peaked at more than
$13/MMbtu in July, before they began a slide that continued through the first
quarter of 2009, US Federal Energy Regulatory Commission staff said Thursday.

"While physical market fundamentals, particularly storage levels, can
explain why natural gas prices rose during the first six months of 2008," FERC
said in its annual assessment of energy markets, "none of the market
fundamentals was extreme enough to explain why spot Henry Hub prices reached
$13.31/MMBtu by July 3."

Spot prices plummeted to $5.71/MMBtu by the end of 2008, and the price
has dropped under $4 in recent weeks.

This boom-and-bust cycle began as giant pools of capital flowed into
financial commodity markets, turning natural gas into an investment vehicle,
agency staff said in its annual market assessment.

After the peak in July, trading started to decline as the global
financial crisis began cutting into the US economy and financial futures and
derivatives traders fled the market.

"Financial trading of energy products continues to be a big deal," said
Arnie Quinn of the Office of Enforcement. "We don't have a great deal of
information on what happens on the financial side."

FERC's report is part of a broader effort by the US government to
understand and explain the record run-up in oil and gas prices last year, the
precipitous decline since, and the impact on future infrastructure development
and market investment.

Plummeting gas prices are hitting the industry hard, the staff reporte
said, adding that more than 20 producers have said they intend to cut capital
expenditures by more than $22 billion combined. FERC staff also cited an
Edison Electric Institute report showing that the electricity industry has
cut capital budgets by 20% for 2009 and 2010.

"Some of the planned reductions are almost certainly related to the fall
in natural gas prices and the desire to rebalance supply and demand," the
report said. Still, FERC staff said reduced access to capital and the high
cost of capital contributed to some of those decisions.

The report also said natural gas is entering a period of flux, adding
that by the end of 2009, major production and gas pipeline infrastructure
projects already under construction will "transform" gas markets.

Kinder Morgan's 1,600-mile Rockies Express Pipeline, for example, has
already started changing gas markets in the Midwest. The commission said new
pipeline capacity is effectively integrating onshore gas supplies out of Rocky
Mountain and Midcontinent basins into the national pipeline grid.

"Natural gas is not scarce," the report found. "Going forward, a key
consideration is whether the natural gas production will be able to get into
balance with consumption in a manner that will not lead to an exaggerated
boom-bust cycle."

FERC commissioners and staff said another energy price boom-and-bust
cycle is a danger. Still, Quinn warned that the financial crisis could be the
bigger danger if it affects long-term power and gas development, including the
ability to increase capacity and drill for more gas.

The gas import market is also in flux, especially the global liquefied
natural gas trade. LNG volumes are increasing, and European and Asian demand
has dropped off some. Potentially, that could further depress natural gas
prices, said FERC officials.

"I suspect the US will be able to attract LNG at much lower prices," said
Office of Enforcement staffer Chris Peterson. "We'll see a rebalancing of
that, a more consistent level of imports than what we saw last year."

--Joel Kirkland, joel_kirkland@platts.com