UBS Reverses Storage Predictions, Surplus Possible

The small group of analysts who were thought to be crazy just two months ago when they predicted the gas storage deficit compared to levels last year would be erased in short order, are now proving to be soothsayers. As of last week's American Gas Association storage report, the deficit level shrank to only 36 Bcf on May 23 from 404 Bcf on March 28.

Lehman Brothers and Salomon Smith Barney both reported in early April that a continuation of recent demand patterns throughout the refill season would allow the deficit to be erased and inventories to reach 3,000 Bcf by Oct. 31 (see NGI, April 9).

According to the American Gas Association, 118 Bcf of gas was injected during the week ending May 18, marking a record four consecutive 100-plus Bcf weekly storage injections. The injection compares to additions of 106 Bcf last week and 55 Bcf last year.

However, 100 Bcf weekly injections are not sustainable, according to UBS Warburg's Ronald J. Barone. "Given continued strong market contango, the ongoing outlook for mild temperatures in several key cooling regions and marketers' desire to pack in supplies before the core cooling/Gulf hurricane season arrives (assuming it does)," he said. "We expect that the storage deficit will turn into a surplus as early as next week and that the surplus could grow until we begin to see more seasonal national temperatures."

Barone's position on Thursday came as a complete reversal from his earlier predictions in April (see NGI, April 9), when he said that entering the injection season with storage at only 19% full with the hopes of refilling it in the months ahead would be a "tall order." He added at the time that a whopping 71 Bcf would have to be injected each week in order to reach the 2,800 Bcf level (85% full) by November. "While the task of injecting 71 Bcf per week is not impossible (as suggested by the aggressive near-term demand destruction calls by some of our peers this week), we believe it is unrealistic," UBS Warburg's analyst said.

As of now, Barone said UBS Warburg's latest calculations show injection requirements of 68 Bcf a week are necessary for supplies to reach 2,800 Bcf by Nov. 1, 2001, which is close to the actual average fill-rate of 65 Bcf from last year during the time period.

Barone also commented on his research group's natural gas spot price, which as of the end of May still greatly exceeds the average for the month of $4.16/MMBtu thus far. He said that the $4.60 April, and $5.20 June composite spot price projections are too high and will be revised early next month.

"We note that, although our $5.75/MMBtu 2001 outlook is aggressive, we are not ruling out an increase in our $3.75/MMBtu 2002 projection, assuming normal temperatures and a strengthening U.S. economy next year," the report said.

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