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Analyst: Deliverability Turn-Around is Slow in Coming

Analyst: Deliverability Turn-Around is Slow in Coming

Despite the large post expiration-day futures correction downward last Thursday, prices rebounded some Friday and for good reason, according to Salomon Smith Barney energy analyst Robert Morris.

"It still looks very tight. Our models that measure deliverability show that even with continued rise in the rig count if we get a normal winter it's going to be tough again next year," he said in an interview. "Even with another record warm winter we're not going to come out with storage levels much different than this year at the end of March."

The American Gas Association (AGA) reported last week that storage injections for the week ending Sept. 22 were 77 Bcf compared with 79 Bcf last year and 41 Bcf in 1998. The injection was in line with Morris' expectations because of the weather, the status of nuclear generation and wellhead deliverability, but the injection report was on the high end of market and Wall Street consensus.

"Over the past twenty-one weeks, injections have averaged nearly 0.5 Bcf/d, or roughly 5% lower than last year," Morris noted in his latest report on market fundamentals. "Consequently, overall storage levels are 429 Bcf, or approximately 15% below one year ago with only six weeks left in the traditional storage refill season. This subdued pace of injections can primarily be attributed to a drop in domestic production throughout most of this summer compared with last year, in our opinion, although domestic production now appears to be on the upswing given the rebound in drilling activity since mid-1999.

"Over the past twenty-one weeks, temperatures (cooling degree days [CDD] weighted by electric home cooling customers) have been slightly warmer and nuclear supplies just over 3% greater than last year. Consequently, storage levels remain on course to enter this winter close to 2,600 Bcf compared with roughly 3,000 Bcf last year."

Temperatures early in the withdrawal season will be a key factor going forward. Both the National Oceanic and Atmospheric Administration (NOAA) and Weather Services International (WSI) issued fall/winter weather outlooks recently declaring that La Nina will be absent and that more normal temperatures will prevail this winter, which means temperatures will be much colder than over the past three winters.

"We see gas prices being strong through all of 2001 perhaps beyond even if we have another record warm winter," said Morris. "If you have a normal winter, things could get very interesting. Gas prices could get even stronger and we could see some significant spikes.

"Our models show we would come out of the winter with storage at about 600 Bcf versus 1,000 Bcf this year, and we know what 1,000 Bcf did to prices this summer," he said.

"Deliverability is starting to turn around. At this point with the rig count above 800, deliverability is starting to turn but we are way behind the eight ball, way behind where we were 18 months ago and it's going to take a while to get it back up," said Morris. He noted that the domestic natural gas rig count dropped two weeks ago to 803 from 816 and rose by only three last week to 806. "Our deliverability models assume that the domestic natural gas rig count rises to 850 by year-end and subsequently to 900 by mid-2001.

"In the meantime, there continue to be increases in demand even with these high prices. We're seeing some increase in demand from the fertilizer industry and one area where demand continues to be very strong is in the electric generation sector."

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