Despite the huge post expiration-day futures correction lastThursday, 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 measuredeliverability show that even with a continued rise in the rigcount, if we get a normal winter, it’s going to be tough again nextyear,” he said in an interview. “Even with another record warmwinter, we’re not going to come out with storage levels muchdifferent than this year at the end of March.”

The American Gas Association (AGA) reported last week thatstorage injections for the week ending Sept. 22 were 77 Bcfcompared with 79 Bcf last year and 41 Bcf in 1998. The injectionwas in line with Morris’ expectations based on the weather, thestatus of nuclear generation and wellhead deliverability, but itwas on the high end of market and Wall Street consensus.

“Over the past twenty-one weeks, injections have averaged nearly0.5 Bcf/d, or roughly 5% lower than last year,” Morris noted in hislatest report on market fundamentals. “Consequently, overallstorage levels are 429 Bcf, or approximately 15% below one year agowith only six weeks left in the traditional storage refill season.This subdued pace of injections can primarily be attributed to adrop in domestic production throughout most of this summer comparedwith last year, in our opinion, although domestic production nowappears to be on the upswing given the rebound in drilling activitysince mid-1999.

“Over the past twenty-one weeks, temperatures (cooling degreedays) weighted by electric home cooling customers) have beenslightly warmer, and nuclear supplies just over 3% greater thanlast year. Consequently, storage levels remain on course to enterthis winter close to 2,600 Bcf compared with roughly 3,000 Bcf lastyear.”

Temperatures early in the withdrawal season will be a key factorgoing forward. Both the National Oceanic and AtmosphericAdministration (NOAA) and Weather Services International (WSI)issued fall/winter weather outlooks recently declaring that La Ninawill be absent and that more normal temperatures will prevail thiswinter, which means temperatures will be much colder than over thepast three winters.

“We see gas prices being strong through all of 2001 and perhaps,even beyond 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 somesignificant spikes.

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

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

“In the meantime, there continue to be increases in demand evenwith these high prices. We’re seeing some increase in demand fromthe fertilizer industry, and one area where demand continues to bevery strong is in the electric generation sector.”

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