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Analysts: Storage Fills Up First in Producing Region

Soft gas demand due to a weak economy and mild weather is driving the industry through what could be a belly-busting storage injection season with record inventories quite possible. Whatever pain is to come for producers will emanate first from full caverns in the producing region, analysts at Barclays Capital said last Tuesday.

The analysts predicted that storage would reach 3,930 Bcf by the end of October

"The market has certainly faced individual storage fields reaching capacity, but not an entire region," the analysts wrote in a research note. "If a region reaches capacity, interruptible injections would be curtailed, linepack will likely be extremely limited, and utilities could institute their operational flow orders that implement severe penalties for deliveries greater than consumption."

What would come after that would be production shut-ins on a regional basis, the analysts wrote; cash prices in constrained producing basins would fall.

"The East Texas market is a prime candidate," the analysts warned. "In this scenario, cash prices would be most adversely affected, but we also think the risk posed by a full storage finish is enough to keep prompt-month prices depressed through October and into November 2009. Perhaps 2009 will give the market a true read of storage capacity."

Whether that happens, of course, depends upon demand between now and the end of storage injection season. Near-term weather forecasts are generally bearish, analysts at SunTrust Robinson Humphrey noted last Wednesday. However, "longer-range models appear slightly more bullish..." they said. More and more, though, the hurricane season is looking like a nonstarter, at least for its potential to seriously pinch back production in the Gulf of Mexico.

Earlier this week Andover, MA-based WSI Corp. trimmed its Atlantic hurricane forecast again, calling for a total of 10 named storms, including five hurricanes, with two of them intense (Category Three or greater) forming by Nov. 30. Other forecasters have been attenuating their hurricane predictions as well (see related story).

Analysts at Thomas Weisel Partners said last week they see some improvement in the gas market, but not a lot. "Cross currents continue to whipsaw natural gas prices as injection figures suggest gas markets are improving, although not in time to prevent storage from ballooning to a record level this season," they said in a research note.

While it would be a painful lesson for producers, greater insight into exactly how much working gas storage capacity is out there would likely be welcomed by many.

Last year the Energy Information Administration (EIA), in what it called a conservative estimate, said peak storage capacity was 3,789 Bcf, the Barclays analysts noted. Penciling in additional capacity created by expansions and new facilities, the Barclays analysts updated EIA's figure with their own 3,950-4,000 Bcf estimate of working capacity.

But wait, working capacity could be as high as 4,200 Bcf if one jiggers the numbers another way and subtracts EIA's base gas estimates from its estimated total gas storage capacity, the analysts wrote. "...[T]his method's result is more 'theoretical,' since the outcome from the calculation has never been tested," they said.

However much capacity there is won't be filled simultaneously as regional factors will have great influence.

"If [storage] injections arrive inline with the past five years regionally, the East and West regions would not breach regional capacity," the analysts wrote, "with 50 Bcf and 100 Bcf of space left, respectively. The Producing region, however, breaches storage capacity by 30 Bcf in our estimation..."

The analysts cautioned that their projections cannot be distilled down to the storage facility level as some storage capacity held by pipelines and power generators will remain empty to meet operational balancing needs.

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