Gas Storage Deficit Erased; Could Storage Reach A New High?

Forecasters expecting the long standing storage deficit compared to last year's levels to be wiped out on Wednesday got their wish. With the winter gas futures months holding attractive premiums for storage arbitrage and gas demand apparently reduced because of high winter prices, an unprecedented series of weekly storage injections over the past five weeks has led to a year-to-year surplus for the first time since January 2000.

The American Gas Association last week reported that 99 Bcf of gas was injected into storage, just 1 Bcf shy of making it five 100+ Bcf weekly injections. Over the last eight weeks, the amount of gas in storage has gone from a 404 Bcf deficit to its current level of plus 7 Bcf compared to the same week last year.

A little more than eight weeks ago, analysts started getting signals that the deficit might be erased. Lehman Brothers analyst Thomas Driscoll, for example, forecasted storage would reach full going into this winter primarily because a significant amount of demand had vanished from the gas market in response to high gas prices (see NGI, April 9). Driscoll said last week he now believes storage could balloon well beyond 3 Tcf before winter because of a loss of 6-7 Bcf/d in gas demand due to high gas prices and fuel switching.

"Injections since the start of the traditional refill season (March 31) have been roughly triple last year's and 57% greater than the seven-year average," said Driscoll. Injections have averaged 11.3 Bcf/d this year compared to only 3.8 Bcf/d last year over the same period when gas prices were much lower than they are currently.

"This excess supply of 4.1 Bcf/d (11.3 Bcf/d minus the seven-year average of 7.2 Bcf/d) could lead to a continuation of surprisingly strong injection rates," said Driscoll.

"Gas prices may need to fall to allow increased consumption," he added. "If consumers need to be induced to use an additional 500-550 Bcf of gas this refill season (less increased power generation demand of 125-150 Bcf) natural gas prices need to fall further. We speculate that natural gas prices must fall low enough to cause consumers that are currently burning residual fuel oil to switch back to natural gas."

Ron Denhardt, vice president of Energy Services for WEFA Inc. noted that the return of significant lost demand has been slow despite the recent drop in prices. He blames it on a time delay in fuel switching. "First, weather-adjusted working gas storage injections have remained extremely high despite gas prices becoming clearly competitive with distillate," Denhardt said. "This winter there was a delay of several weeks in fuel switching from gas to distillate. Thus, it is possible that this delay is occurring in the opposite direction now. However, several of our clients have indicated that they have already switched from distillate to gas. If gas does not have much more market to regain from distillate then either prices must decline enough to regain market from residual fuel oil or warm weather must drive up gas generation to rebalance the market," he said.

Denhardt said regaining the residual fuel oil market will require Henry Hub prices of $3.80-$4.00/MMBtu for several weeks.

If storage injections remain above average, working gas levels at the beginning of winter theoretically could balloon to more than 3,400 Bcf, according to Driscoll. Working gas levels have peaked around 3,100 Bcf and averaged 2,900 Bcf, but 3,400 Bcf would be a new high.

"End-October storage has averaged 2,900 Bcf and clearly storage will not get to the 3,400 level," Driscoll said. "Higher demand will be needed to fill the gap. We believe that natural gas needs to recapture demand that is currently being filled by lower-priced residual fuel oil for natural gas supply and demand to balance."

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