The combined impact of 17% below-normal heating degree days (HDD) in the six-week period ending Nov. 18 and various demand destruction effects more than offset the 4.6 Bcf/d of shut-ins caused by Hurricanes Katrina and Rita, and U.S. natural gas storage is expected to be above historical levels by April, according to separate analyses by two energy consultants.
In the latest "Monthly Energy Outlook," Stephen Smith Energy Associates suggests that the storage surplus (compared to a 10-year average from 1994 to 2003) will grow to 340-350 Bcf by early December, and assuming normal HDDs, will decline to about 273 Bcf by year's end. The "most critical assumption" of the surplus scenario is the timing of gas production recovery from the Gulf of Mexico shut-ins, Smith said. However, the Mississippi-based consultant still estimates storage levels will remain above the 10-year average at the end of the winter heating season next April.
"The two main factors driving recent storage surplus increases have been (1) the warm fall weather...and (2) post Rita/Katrina demand destruction effects, which have exceeded the shut-in gas production," said Smith. "The storage surplus was 95 Bcf on Oct. 7 and is projected to be 332 Bcf on Nov. 18." (The Energy Information Administration reported U.S. inventories were 3,274 Bcf on Nov. 18.) "But...both of these factors are now easing," he said, "and our base case 2005 storage path is not projected to exceed the 2004 storage trajectory between now and year-end."
John Gerdes of The Gerdes Group expects "well above average gas in storage" exiting the heating season. In a note to clients, the Houston-based consultant said on a weather-normalized basis, the working gas withdrawal on Nov. 18 implied a 3.1 Bcf/d oversupply condition versus the long-term average, despite the hurricanes.
"Hurricane damage is expected to materially depress Gulf of Mexico/Gulf Coast gas production through late February 2006 (assume 10% of production permanently lost)," said Gerdes. "High natural gas prices should result in significantly lower industrial gas demand versus the long-term average and appears likely to encourage approximately 2% conservation mainly on the part of residential/commercial users. As a consequence, assuming normal weather, gas in storage exiting the heating season should exceed 1,400 Bcf (300-plus above the long-term average)."
At the end of 2005, Smith noted the storage surplus was about 390 Bcf over 10-year norms, and the price spread was $2/MMBtu. For year-end 2005, "our base case projects as 273 Bcf storage surplus versus 10-year norms. Based on this storage outlook, we would estimate a year-end gas-to-resid spread of $2.50-3.50/MMBtu and a year-end Henry Hub cash price (or January bidweek price) of $9.50-11.00/MMBtu."
The second price determinant, Smith noted, will be the severity of winter weather in 1Q2006. "Most weather forecasts indicate normal or slightly colder-than-normal weather for the main gas consuming regions. Other important factors include oil price behavior (we assume mid-$50s West Texas Intermediate for 2006), continuing [Hurricanes] Rita/Katrina shut-ins and production deferral effects in the range of 125-150 Bcf for the first quarter." Also included are liquefied natural gas (LNG) terminal expansions at Lake Charles, LA and Elba Island, GA in 2006, and "above-average odds for another active hurricane season."
Smith's price forecast for 1Q2006 has been lowered to $10.50/MMBtu (Henry Hub) from $11.40, and the 2Q2006 forecast is now $8.10 from $8.50. Overall, Smith is forecasting gas prices averaging $8.90/MMBtu for 2006, down from a previous guidance of $9.10. Long-term, the price forecast for 2007 is $8, up from $7.50, while in 2008, prices are expected to be about $7.25/MMBtu, up from $7.
Gerdes' 4Q2005 price forecast of $12/MMBtu "is supported by the protracted recovery" following the hurricanes. In 2006, "well above average gas in storage exiting the heating season, strong growth in LNG imports and recovery in Gulf of Mexico/Gulf Coast production to 90% of pre-hurricane levels (late February) suggest gas prices should fall below $7/MMBtu" in the second and third quarters.
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