Natural gas storage facilities are busting at the seams right now, causing analysts to be increasingly bearish about December prices. The American Gas Association (AGA) reported last Wednesday the industry was still putting in more inventories during the third full week of November in reaction to mild weather, low prices and lack of demand. With the 12 Bcf injection AGA reported last Wednesday, storage is at a new record high of 3,144 Bcf and the year-on-year storage deficit is at a crushing 642 Bcf, leaving a glut of gas supply on the market that will put severe downward pressure on spot prices for months to come, according to analysts.

The third weekly net injection in November came as a surprise to many observers. Last year during the same week the industry withdrew 146 Bcf from storage. Consensus estimates were between a 10 Bcf withdrawal and a 10 Bcf injection with many expecting an injection of only a few Bcf. Lehman Brothers analyst Thomas Driscoll said he was expecting a 15-20 Bcf withdrawal. Heating degree days during the week were 109 versus 199 last year and 144 normally.

The 12 Bcf injection for the week ending Nov. 23 was “surprisingly bearish given the injection levels experienced over the past few weeks,” said Driscoll. “We estimate that heating demand [during that week] increased about 25 Bcf from the prior week (gas-weighted heating degree days (HDDs) increased by 19 from 90 to 109 in the prior week) yet the storage injection was only 3 Bcf less than last week’s 15 Bcf reported injection. We remain concerned that the current high storage levels and the apparent continued mismatch between supply and demand will combine with falling prices of competing fuels (such as residual fuel oil) to lead to disappointing natural gas prices over the next several months,” he said, projecting a range between $2 and $2.25. However, Henry Hub prices already were dipping below $2 late last week and December bidweek could set a decidedly bearish tone. UBS Warburg analyst Ronald Barone expects prices to remain between $1.85 and $2.15 in the short term.

Driscoll forecasts a withdrawal of 40 Bcf (5.7 Bcf/d) for the week ending Nov. 30 compared to a withdrawal of 73 Bcf last year and a five-year average withdrawal of 51 Bcf. This would leave inventory levels at 3,104 Bcf, 675 Bcf above last year.

“Our…forecast is based on the National Oceanic and Atmospheric Administration’s (NOAA) estimated heating degree days of 148 versus 161 last year and 161 normally, and cooling degree days of 4 versus 2 last year and 3 normally,” said Driscoll. “The weather for the season to date (since September 30, based on heating degree days) has been 24.1% warmer than last year and 16% warmer than normal. We estimate that the weather has decreased heating demand by 147 Bcf versus normal and 246 Bcf versus a year ago. The cumulative injection since September 29, 2001 is 230 Bcf versus 22 Bcf a year ago.”

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