Trends in Natural Gas Markets 2006

Bradford G. LeachSenior Director, Electricity and Natural Gas

ResearchNYMEX

2006 Annual MeetingIllinois Municipal Gas Agency

April 19, 2006Springfield, IL

An Overview of NYMEX

• Regulated by Commodity Futures Trading Commission as a Trading Facility and a Clearing Organization

• Two Divisions: NYMEX and COMEX

• Continuous 133-Year History as Commodity Exchange

• Open Outcry Floor Trading

• Web-Based Clearing and Trading

Economic Function of Regulated Commodity Futures Exchange

• Hedging Function– Price risk is competitively shifted between parties

with opposing risk profiles or tolerance for risk

• Price Discovery– Prices are determined :

• In an open, competitive and transparent manner• By market participants• And disseminated throughout the world instantaneously

through market data vendors

NYMEX Regulatory Protections

• NYMEX CFTC Regulation

• Compliance Department

• Market Surveillance

• Trade Surveillance

• Financial Surveillance

NYMEX MARKET SURVEILLANCE

• Staff Conducts Daily Surveillance of NYMEX Market Activity and Analyzes Trading Activity and Fundamental Factors in Underlying Cash Markets

• Futures Review is Based Upon Large Trader Reporter Data and Exchange Audit Trail

• Staff also Enforces Exchange Position Limit and Position Accountability Levels

NYMEX Clearinghouse and Financial Protections

• Currently 40 Clearing Members• Clearing Member Financial Requirements

– $5 Million Minimum Net Working Capital• Currently $14 Billion on Deposit in Margin Funds• Rated AA+ by S&P• Clearing Member Guaranty Fund of Over $140 Million• $100 Million Default Insurance• Margin Requirements

– Original– Variation

• NYMEX Emergency Procedures

Emergency Procedures

• Delivery Committee Operation• Hurricanes Andrew, Katrina, Rita• Resolution of Financial Difficulties with

Clearing Firms• Rapid Adjustment to Volatile Market

Conditions – Persian Gulf, NG Volatility, Increase in Oil

Prices • Business as Usual

Total Volume of NYMEX Cleared Contracts in Million Contracts / Year

(Thru 12/05)

0

20

40

60

80

100

120

140

160

180

96 97 98 99 00 01 02 03 04 05

Options

Futures

NYMEX Natural Gas Annual Volumes

0

5,000,000

10,000,000

15,000,00020,000,000

25,000,000

30,000,000

35,000,000

40,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Cont

ract

s

Futures OptionsThru 10/05

NYMEX CLEARPORT®

0

50,000

100,000

150,000

200,000

250,000

300,000

Date

Con

trac

ts

20-Day Average 5-Day Average 60-Day Average

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

4/3

/1990

6/3

/1991

8/3

/1992

10/3

/1993

12/3

/1994

2/3

/1996

4/3

/1997

6/3

/1998

8/3

/1999

10/3

/2000

12/3

/2001

2/3

/2003

4/3

/2004

6/3

/2005

$/M

MB

tuNYMEX NATURAL GAS FUTURES

FRONT MONTH SETTLE(4/3/90-11/30/05)

December 2005

0.0002.0004.0006.0008.000

10.00012.00014.00016.00018.000

4/1/

2005

5/1/

2005

6/1/

2005

7/1/

2005

8/1/

2005

9/1/

2005

10/1

/200

5

11/1

/200

5

12/1

/200

5

1/1/

2006

2/1/

2006

3/1/

2006

4/1/

2006

$/M

MB

tuNYMEX NATURAL GAS FUTURES

FRONT MONTH SETTLE(4/1/05-4/10/06)

January 2006

Natural Gas VolatilityFront Month

0.00%20.00%40.00%60.00%80.00%

100.00%120.00%140.00%160.00%180.00%

1/31

/200

1

5/31

/200

1

9/30

/200

1

1/31

/200

2

5/31

/200

2

9/30

/200

2

1/31

/200

3

5/31

/200

3

9/30

/200

3

1/31

/200

4

5/31

/200

4

9/30

/200

4

1/31

/200

5

5/31

/200

5

9/30

/200

5

1/31

/200

6

Historical 20 Day Annualized Volatility Implied Volatility ( Front Month)

Natural Gas Forward Curves(11/30/05 Settlements)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

1/06 2/06 3/06 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08

MM

Btu UK

US

U.S. Natural Gas Total Consumption

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Jan

Feb Mar Apr

May Ju

nJu

lAug

Sep Oct

NovDec

2001

2002

2003

2004

2005

Source: EIA

1997 U.S. Natural Gas Consumption Sector Distribution

24%

15%

41%

0%

20%

Residential

Commercial

Industrial

Vehicle

Electric

Source: EIA

2004 U.S. Natural Gas Consumption Sector Distribution

14%

24%26%

36%

Residential

Commercial

Industrial

Vehicle

Electric

Source: EIA

U.S. Natural Gas Sector Distribution Summary

(1997-2004)

• Industrial use has declined from 41% to 36% of total U.S. consumption (-1.1 Tcf)

• Electricity use has increased from 20% to 26% of total consumption (1.3 Tcf)

• This shift from industrial to electric use has resulted in an increase in total natural gas that is subject to weather sensitive demand and pricing

U.S. Electricity Consumer Delivery

0100200300400500600700800900

Bcf

/mo

nth

  2001

  2002

  2003

  2004

  2005

Source: EIA

30% over 0425% over 04

Total U.S. Natural Gas Production vs. Natural Gas Wells Drilled

18,000

18,200

18,400

18,600

18,800

19,000

19,200

19,400

19,600

19,800

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Billi

on C

ubic

Feet

0

5000

10000

15000

20000

25000

Total Production

NG Wells Drilled

Source: Energy Information Administration

U.S. Natural Gas Vintage Production

0

10

20

30

40

50

60

70

Year

BC

F/D

ay

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

<1990

Source: IHS Energy

Gulf Of Mexico Gas DeclineFirst Year Well Depletion

0%

10%

20%

30%

40%

50%

60%

Wells Completed During Time Period

Effe

ctiv

e D

eclin

e R

ate,

%/y

r

SOURCE: Simmons & Company International

Gulf of Mexico First Year Natural Gas Well Decline

Source: IHS Energy

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

1990 1992 1994 1996 1998 2000 2002 2004

Texas First Year Natural Gas Well Depletion

Source: Gary S. Swindell

Gulf of Mexico - Shelf / Deep Water Comparison

0

2

4

6

8

10

12

14

16

Year

Bcf

/day Deep Water

Shelf

Source: IHS Energy

2005 Announced Deepwater Discoveries, Gulf of Mexico

(as of 11/30/05)

• • Prospect Operator Area Water Depth

(ft) • Clipper Pioneer Green Canyon299 3,452• Knotty Head Chevron/Unocal Green Canyon512 3,557• Q Spinnaker Mississippi Canyon961 7,925 • Stones BP Walker Ridge 508 9,576 Genghis

Khan Anadarko Green Canyon 652 4,300• Anduin Nexen Mississippi Canyon755 2,400

Wrigley Newfield Mississippi Canyon506 3,700• MondoNW Ext Anadarko Lloyd Ridge001 8,340• Jubilee Ext Anadarko Lloyd Ridge309 8,774

Source: MMS

Source: EIA

Source: EIA

Source: EIA

U.S. Natural Gas Pipeline Imports(1985-2005)

0

0.5

1

1.5

2

2.5

3

3.5

4

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1998

1999

2000

2001

2002

2003

2004

2005

Tri

llio

n C

ub

ic F

eet

Imports

Source: EIA

Canada First Year New Well Depletion

0%

10%

20%

30%

1966-69 1970-74 1975-79 1993 1995 1996 1997

Date Well Completed

An

nu

al D

ecl

ine

Ra

te,

%

SOURCE: Simmons & Company International

Canada First Year Natural Gas Well Decline

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

1990 1992 1994 1996 1998 2000 2002 2004

Expanded and proposed new re-gas terminals dot the coastlines.

Existing LNG terminals

Proposed terminal sites

Gas pricing points/hubs

Source: Ben Schlesinger 7/2005; illustrative.NGI Pipeline Map

Ivan v. Katrina/Rita MMS Daily Natural Gas Shut-in Reports

Through 4/5/06

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

R1 R7 R13 R19 R25 R31 R37 R43 R49 R55 R61 R67 R73 R79 R85

Ivan

KatrinaRita

R1 is report following hurricane landfall

EIA U.S. Natural Gas Storage Report Historical Comparison

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Bil

lion C

ubic

Fee

t (B

cf)

5-year Avg. (00-04) 20032004 20052006

37% above 2005 62% over the 5-Year Average

NYMEX NG Forward Curves

$0

$2

$4

$6

$8

$10

$12

$14

$16

Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

4/12/2006

2/1/2006

12/9/2005

9/20/2005

8/19/2005

6/20/2005

NYMEX NG Forward Curves(Summer 06-07)

$0

$2

$4

$6

$8

$10

$12

Jul-06 Nov-06 Mar-07 Jul-07

4/3/2006

2/2/2006

11/28/2005

9/20/2005

8/19/2005

6/20/2005

NYMEX Chicago Citygate July Basis Contract (NB) January-June

-.90

-.80

-.70

-.60

-.50

-.40

-.30

-.20

-.10

-

.10

.20

Cent

s/M

MB

tu

2003

2004

2005

2006

July 2006 Natural Gas MMBtu PricesApril 3, 2006 Settlements

• Market Henry Hub Basis Total Price

• Chicago $7.68 -.51 $7.18• So Cal $7.68 -1.18 $6.50• Malin $7.68 -1.19 $6.49• Michigan $7.68 -.28 $7.40• Houston Ship$7.68 -.23 $7.45• TX Eastern M3 $7.68 .57 $8.24• Transco Zone 6 $7.68 .66 $8.33

July 2006 MWH PricesApril 3, 2006 Settlements

• Market MWh Implied HR

• Zone A $78.29 9,400 • Zone G $100.50 12,100• Zone J $119.33 14,300• ISO-NE $93.21 11,200• PJM Western Hub $86.83 10,400• Cinergy Hub $72.44 10,100• SP-15 $73.25 11,300

July 2006 Natural Gas MMBtu PricesFebruary 2, 2006 Settlements

• Market Henry Hub Basis Total Price

• Chicago $8.80 -.55 $8.25• So Cal $8.80 -1.26 $7.54• Malin $8.80 -1.30 $7.50• Michigan $8.80 -.26 $8.54• Houston Ship$8.80 -.43 $8.37• TX Eastern M3 $8.80 .62 $9.42• Transco Zone 6 $8.80 . 65 $9.45

WSI Energycast Seasonal Forecast

DISCLAIMER

The New York Mercantile Exchange, Inc., (the “Exchange”) is making this information available for informational purposes only. The Exchange has attempted, wherever possible, to make statements in good faith based upon current information and expectations by using words such as "anticipate," "believes," "expects" and words and terms of similar substance. Any forward-looking statements made by, or on behalf of the Exchange, involve a number of risks, trends, and uncertainties and other factors that may cause actual results to differ materially. As such, readers are cautioned not to place undue reliance on the information contained herein, which only speaks as of the date of the issuance of this information.