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CERA: Record Storage Levels May Cause 'Abrupt' Fall in Gas Prices

Parts of the North American natural gas storage system may reach their operational limits this fall, resulting in "abrupt decreases" in gas prices as some storage fields are unable to receive injections, according to an analysis by Cambridge Energy Research Associates (CERA) that was released last Monday.

Absent a warmer-than-normal summer or significant gas supply disruptions by hurricanes, CERA said it expects the North American gas storage inventory level to rise to 4.2 Tcf by Oct. 31, a more than 95% fill of expected working gas storage capacity. Given the end-of-cycle physical limitations on injections, some U.S. storage fields, especially in the East region, will not be able to accommodate additional injections then, noted the Cambridge, MA-based energy advisory and consulting firm.

"In today's North American gas market where prices are market responsive, insufficient storage working capacity to accommodate all gas available for injection is likely to lead to a sharp and swift drop in spot gas prices," said CERA Director Ken Yeasting. "As gas prices fall toward $5 per MMBtu, displacement of coal-fired generation by gas-fired generation will provide additional demand and thus support gas prices and rebalance the market."

The coal-fired units mostly likely to be displaced would be older, inefficient eastern coal plants burning high-cost Appalachia coal without emission-control equipment, in markets where prices for sulfur dioxide emissions allowances are relatively high, he said.

CERA calculated that North American withdrawal capacity ranges from 48 Bcf/d when inventory is at or above 60% of working capacity, down to 37 Bcf/d or less when inventory is below 20%. North American injection capability ranges from 33 Bcf/d when inventory is below 50% of working capacity, down to 15 Bcf/d or less when inventory is above 90% of working capacity, it said.

Consequently, CERA said when gas storage inventories are high in the summer, the gas market has less flexibility to respond to daily or balance-of-season decreases in demand or increases in supply, and it will take a greater decrease in gas prices to balance the gas market when inventories are high and injection capabilities are low.

With Lower 48 gas storage inventories expected to be at a record level of 3.643 Tcf by the end of October, compared with a working storage capacity of 3.760 Tcf, there will be little spare working storage capacity to accommodate additional gas supply, according to CERA. At these levels, it estimates daily storage injection capability of the Lower 48 will fall to 10.7 Bcf/d or less at the end of the injection season.

With September and October storage injections expected to average 11 and 10.2 Bcf/d, respectively, it is likely that some storage fields, notably those in the East region, will not be able to accommodate additional injections, CERA concluded.

Golden, CO-based Bentek Energy expressed similar concerns about storage this year. Earlier this month, it predicted that 20 gas storage systems from a sampling of 27 operations could be full well before the end of the storage injection season this year. Some of the vulnerable systems would include the massive Columbia system, National Fuel, Tennessee Gas, Southern Natural and others (see NGI, June 5).

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