Gas Analysts: Storage Could Fall to Critically Low Levels
If you got a lump of coal in your stocking this Christmas,
rejoice. It could be the only thing left to heat your home by the
end of winter. There is a growing consensus among gas market
experts that there will be a shortage by March if the weather stays
normal or colder than normal.
This surprisingly cold winter has reduced gas storage down to
record lows for this time of year, and given predictions for more
cold weather the storage situation probably is going to get worse
before it has a chance to get better. The winter so far has been
21% colder than the 10-year average and 35% colder than last year,
according to Salomon Smith Barney. And below-normal temperatures
should linger at least through the end of the year, according to
the most recent short-term forecasts.
Gas storage, meanwhile, is only 64% full. Last week, the
American Gas Association reported that storage fell 158 Bcf during
the week ending Dec. 15 to 2,113 Bcf. Working gas levels are 457
Bcf below the five year average and 630 Bcf below levels at the
same time last year.
The market acknowledged the storage problem long ago but
continues to produce new records nearly each week. Last week was no
exception. Futures prices for January delivery are fast approaching
$10/MMBtu and some observers believe much higher prices are yet to
come unless the weather turns suddenly warmer, a significant amount
of demand is removed from the market or a large amount of new
supply kicks in.
"It is difficult to identify how the market is going to avoid
running out of gas without much higher prices and/or involuntary
curtailments unless we have extremely warm weather," said WEFA
Inc.'s Ron Denhardt last week. Analysts at Petrie Parkman &
Co., Raymond James and Associates, UBS Warburg and Salomon Smith
Barney echoed his comments.
All of the analysts agreed that an average pace for storage
withdrawals for the rest of the winter would put working gas levels
in the negative column, which might be impossible given the
pressure requirements for withdrawing gas from storage fields.
"At the rate winter is setting in, by the middle of February
we'll be where we usually are in April" in regard to natural gas in
storage, said Thomas A. Petrie, chairman of Petrie Parkman &
Co. in Denver. "By March 15 we will be in a very serious situation.
We'll be digging into pad gas, and who knows how far you can dig
into that," he said. If the industry is able to tap into the
cushion gas at the bottom of the storage cavern, "you're just going
to have to replace it. The shoulder months are going to be
Analysts at Raymond James and Associates predict an
"unprecedented gas shortage in the second half of this winter" and
an $8/Mcf spot price average during the first quarter at the Henry
Hub. They said storage levels "should fall well below anything we
have seen in recent history." Given normal weather for the rest of
the winter, storage levels would have to fall to a "completely
unfeasible" -280 Bcf of working gas by April 1. "Keep in mind that
we have never really tested the gas storage system below +600 Bcf.
This means gas prices must continue to rise sufficiently through
the second half of the winter to discourage between 5 and 10 Bcf/d
of demand in the final 90 days of winter. In other words, the U.S.
will likely see some form of price driven rationing of natural gas
in the second half of this winter."
Raymond James' projections of storage withdrawals are
substantially higher than the five-year average. The firm predicts
industry will withdraw an average of 182 Bcf/week through the week
ending March 9, but over that period during the past five winters
withdrawals have averaged only 120 Bcf/week. Even with 120
Bcf/week, however, there still would be only 673 Bcf of working gas
in storage on March 9.
Salomon Smith Barney analysts Robert Morris and Michael Schmidt
--- probably the most optimistic of the bunch --- predicted working
gas levels would end the winter no higher than 600 Bcf. "We believe
that total natural storage levels cannot be drawn down to below 500
Bcf due to physical limitations, which, if the winter maintains its
current course, could result in physical shortages of natural gas
near the end of this season."
Ronald J. Barone of UBS Warburg said working storage levels
probably would fall to 517 Bcf by April 1. "However, given
underlying demand creep, the chilly weather outlook (and the fact
that three of the prior six years were very mild), we cannot rule
out an exhaustion of supplies by April 1."
Demand Reductions Critical
Petrie, Denhardt and the analysts at Raymond James said it will
be critical for the gas industry to cast off some demand between
now and March. The market already has started to allocate supplies,
with industries such as methanol, ammonia and glass opting out
because of high prices. Prices continue to post new records and
appear likely to cross the $10 mark for the first time in history
"In order to end the heating season with 500 Bcf in storage it
will be necessary to have some combination of supply increase or
demand decrease that adds up to 6 Bcf/d," said Denhardt. "We simply
cannot determine how this will happen."
Denhardt said even if a huge 4% increase in U.S. production
occurs during the remainder of the heating season that still would
account for only 2 Bcf/d and is very unlikely to occur anyway. "If
you assume you lose half of the fertilizer industry (0.8 Bcf/d) and
some other industrial gas consumption, you may get 1.2 Bcf/d. This
[with the unlikely production increase] all adds up to 3.2 Bcf/d,
far short of 6 Bcf/d" required, Denhardt added.
Fuel switching is expected to take at least 1.5 Bcf/d out of the
market potentially much more. "This adjustment over about 14 weeks
would bring storage levels to a plus 27 Bcf." However prices have
to go much higher to knock even more demand out of the market, he
said. Denhardt sees the potential for 7.5 Bcf/d of demand to be
cut. However, there are a lot of "ifs" involved, he noted. Much of
it would come from switching to dirty burning fuels and
environmental restrictions stand in the way.
"Thus there is the capability for the market to respond," he
said. "However, there has not been an adequate response to date.
Again, the question is what price level will be necessary... The
numbers tell us that prices of $9/MMBtu at Henry Hub appear to be
much too low...," he said. "In fact it is difficult to determine
what price will be high enough to balance the market unless we have
extremely warm weather. Further, the problem is more severe than
prices. There is a serious question of the adequacy of supply at
any price this winter."
Denhardt predicts this week's storage report will show another
whopper withdrawal of 180 Bcf for the week ending last Friday. That
would leave working gas levels, according to the American Gas
Association, at 1,933 Bcf, which would be 637 Bcf or 25% lower than
last year and 131 Bcf or 6% below the lowest level in five years.
"[W]e project that is not enough gas in storage to get through the
heating season," said Denhardt. "Others have come to the same
For the long-term, Petrie predicts "it will be a two to five
year work-out, if you have good policy responses," before there is
an optimum supply-demand match.
One of the policy responses that will be critical, the veteran
oil and gas analyst believes, is building the Alaska pipeline.
"There's a good chance it will be built with Bush as president."
Unless the policy responses are forthcoming, the nation faces "a
supply-induced recession. We've been living off surplus for a long
time." Petrie likened the current situation to 1970 "when we ran
out of oil. It took us 10 years to work out of that one."