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Record Storage Levels Could Cause Production Shut-Ins This Summer

With natural gas inventories at record levels, there may come a time this summer when available storage space is scarce and gas producers are forced to shut in supplies, according to Steve Harvey of FERC's Office of Enforcement.

"As we go through the summer, we will fill storage. [There] will come a point where you can't put anymore in. That may well create a summer condition where if there isn't any place to put extra actually have to start shutting it in," Harvey said during a presentation on the summer energy market outlook during FERC's monthly meeting last Thursday.

Gas in storage currently is at 2.08 Tcf, which Harvey said is 0.7 Tcf ahead of the average for this time of the year. Stated another way, current gas inventories are about two months ahead of average storage levels going into the summer months, he said.

"We're in a condition in storage that we've never really been in before," Harvey noted. The seasonal spread between near-month gas futures and January 2006 futures is "extraordinarily large" -- nearing the $5 point -- and reflects the high storage levels, he said. The seasonal spread was $4.81 at the end of last Wednesday trading.

In contrast, the seasonal spread was around 80 cents last year this time, and about 30-40 cents in 2004, Harvey said. "I don't know what that spread will necessarily look like [as the year wears on]. We're so out of the norm right now."

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