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FERC Staff Sees Likelihood of Record-High, Season-Ending Storage Levels

Working gas inventories on Feb. 10 reached the highest point for this time of year in the last 12 years, and FERC's Office of Market Oversight and Investigations (OMOI) said last week that even record high withdrawals through the rest of the winter could still result in record high inventories on April 1.

"Instead of being short of supply, the industry now faces the task of getting enough gas out of storage by the end of March...," Stephen Harvey, deputy director of OMOI, told the full Commission in a gas market presentation on Thursday. "For physical operations reasons, inventories for most storage facilities have to fall to certain levels to maintain their integrity."

Storage inventories as of the latest report from the Energy Information Administration were 649 Bcf, or nearly 38%, above the five-year average. "This is a remarkable story," Harvey added. "After starting the winter in a strong inventory position but with a real concern about the availability of supply from the Gulf for the winter, our literally one-in-100 chance warm weather has resulted in a current surplus of gas inventory. We bet as a country on mild weather and we hit the jackpot."

Harvey noted that this January was the warmest January in the full 112-years tracked by the National Oceanic and Atmospheric Administration (NOAA). Temperatures averaged 8.5 degrees above normal. Fifteen states in the Northern Plains, Great Lakes and Midwest had their warmest January in 112 years and another 26 states have above-normal temperatures.

Figures released by the Federal Reserve on Wednesday indicate that natural gas deliveries fell 15% from December to January, Harvey noted. "This record warm spell followed the ninth warmest November and a roughly average December. In all, this winter's extraordinary weather and resulting weak energy demand has resulted in gas market conditions we certainly could not have predicted in the fall."

He said there are three basic reasons that gas storage withdrawals per heating degree day in December had been smaller than what had been required in the past: mild weather, demand reduction by customers in response to high prices and supply response to prices.

"Almost certainly high November and December gas bills changed customer behavior," he said. "In addition, the Department of Energy and many state and local authorities have made significant efforts this winter to encourage conservation..."

There also is anecdotal, "but compelling," evidence of a supply response to high prices, he added. The rig count recently hit record highs not seen since the early 1980s. Harvey also pointed to a report from Golden, CO-based Bentek Energy that U.S. production is dramatically responding to the current high price environment. Using gas pipeline flow data, Bentek found that multiple producing basins showed significant increase in 2005: Fort Worth rose 17%, Uinta/Piceance was up 16%, East Texas jumped 11%, Arkla increased 10%, Raton was 9% and Wind River was up 6%.

"Were it not for the hurricanes, U.S. production would have increased by 2.7% over 2004," Harvey said, quoting the Bentek report released last week (see NGI, Feb. 13). "The basins Bentek identifies as showing growth are significantly smaller than the Gulf Coast production, but their combined effects are material."

Looking into the future, he said a lot depends on the direction of oil prices, which are falling but still pretty high at just below $60/bbl. "Last month I showed how high oil prices create something of a floor for gas prices. At this point, we are watching to see whether that floor will hold in the face of extremely high storage inventories and possible demand and supply responses to prices."

Harvey downplayed the ability of the gas futures market to predict actual future gas prices. The gas futures market is "in no sense a predictor of future prices," he said, "because futures prices include other forms of value than just expected supply and demand. Still, their patterns reflect current expectations of buyers, sellers and others interested in the energy market. Currently, futures are indicating an expectation that prices today are about as low as they are likely to be for the remainder of the decade."

One reason summer futures prices remain so high, said Harvey, could be the expectation that gas demand from power generation will increase again this summer. Over the five years ending in 2004, power demand grew an average of 1.5% per year while gas-fired power generation increased at an average rate of 5.1% per year.

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