AGA Storage Number Perplexes Market Observers
Many market experts were stunned last week by the American Gas Association's (AGA) report of a 3 Bcf net injection into the nation's storage facilities during the week ending Aug. 10. An injection that small in August is unprecedented and had an immediate impact on prices, pushing near-month futures up 37 cents on Wednesday with a similar increase in cash Thursday morning. However, many marketers said they were attempting to ignore the data as an anomaly or an outright mistake by AGA or the storage companies it surveys.
The report, nevertheless, could have a longer lasting impact if market players begin to consider it a signal that perhaps the supply-demand balance is a bit tighter than expected or an indication that there's actually more gas-fired generation demand out there than has been accounted for in the current price of gas. The increasing complexity of storage management has raised the level of uncertainty and broadened the range of interpretation (see related story).
Where did all the gas go that was flowing into storage just a few weeks ago? It was a 77 Bcf decrease from the prior week's storage injection, 49 Bcf less than the same week a year prior and at least 60 Bcf less than the historical average for weekly injections during the month of August. Moreover, the market was expecting substantially more than 50 Bcf. A 12 Bcf withdrawal was reported in the Consuming Region East, and the Producing Region showed zero change from the week prior. Storage stands at 2,286 Bcf, or 69% full, which is 249 Bcf more than at the same time last year.
"Totally shocked," was how a buyer for one of the largest northeastern combination utilities described his reaction to the tiny injection. "We've called quite a few of the Northeast utilities and actually everyone we've talked to is in a similar situation to where we are -- we all injected. We're finding it hard to believe that the East number was a minus 12. We have a lot of storage. Some of the other utilities we called also were big storage holders, too.
"We think we'll definitely see a [futures market] correction, and we're already down 12 cents today [Thursday] on the New York Mercantile Exchange so I have a feeling it will be pushed aside as an anomaly. We're not going to react heavily to it. We'll look at it as a blip on the radar screen."
Despite that initial comment, however, the buyer was quick to note there is "a lot of new gas-fired generation out there. In the last four years all the new plants that have been built are gas-only facilities. Last week was definitely a good taste of that. But last week was not enough to move us. I think it was a mistake in some of their [AGA] numbers."
AGA has repeatedly denied any data problems, saying it double checked its numbers and had its participating companies check them as well. It noted that its survey sample is the largest in the Consuming Region East, where the 12 Bcf withdrawal was reported last week. It also went as far as to say there would not be a correction.
"What I have said is certainly we would make a correction to the number if a company gave us data or information subsequent to our reporting that would cause us to do so, but none has done that," said AGA's Chris McGill, managing director of policy analysis. "We haven't gotten anything that would say that we were making a correction. That rumor was spreading like wildfire, but it didn't come from us."
McGill also brushed off accusations of data manipulation. "It seems that several times a year the numbers that we report...don't match industry expectations... But our numbers tend to meet the baseline, which is EIA's numbers, as they are evaluated over time. This specific week I don't expect to be any different.
"The report [for] last week showed a fundamental change, and in terms of history it was an extraordinary difference," he noted. "In terms of the numbers that came to us, we knew we had some numbers that were different, not only than what we had the preceding weeks, but also from other summer net injection periods, and we followed up on them and the numbers were verified," he said.
The utility buyer said he didn't think AGA would ever "consciously manipulate the numbers. I think that would hurt them significantly. They are not in the business of moving markets. They are in the business of reporting information. Granted, the information they get delivered to them may be manipulated. I just don't know."
The buyer also said he heard one of the major pipelines to the Northeast reported during the tropical storm that it was utilizing its system to keep people whole during the extreme heat. That could have entailed possibly withdrawing some gas from storage, he admitted. Columbia Gas Transmission, the second largest storage operator in the country with 240 MMcf of working gas capacity, said last week it was not among the storage operators who were showing daily net withdrawals during the week ending Aug. 10. However, its injections were somewhat less than the week prior because of the strong draw from power generators, said spokesman Kelly Merritt.
McGill said there are probably a large number of factors that caused the minuscule net injection. He mentioned the impact of the tropical storm on production and the need to serve increased power generation loads because of the 25% warmer-than-normal temperatures.
"However, if you look at the cash market, the curve has been going down. That may mean that if there is a market opportunity to move a volume of gas from storage to a consumer right now you could do that assuming four or five weeks down the road you could replace it at the same price or maybe even less," he noted.
The other thing, he said, is that the sudden increases in power generation do take a lot of gas out of the system these days. "Were pipelines perhaps re-balancing their systems, repacking their lines with gas out of storage because of that sudden drawdown? It's a possibility. Since I'm assuming that the data given to us is correct, my assumption then has to be that all of these things just lined up together and we had a very extraordinary week," he said.
"I was in Houston on Tuesday giving a talk on the storage report," said McGill, "and after my talk a gentleman, an analyst in Houston, came up to me and said, 'Chris, you know I talk to storage operators all the time. I was talking to one of the large operators in the East, and he told me they had their whole system turned around and were selling gas out last week... What he wanted me to do was verify that. I wouldn't do that, but what he said gave me an inkling of this happening, and when I came in Wednesday morning I was interested to see what had happened. I guess he was on to something."
It was an extremely hot week, particularly in the Northeast. The National Oceanic and Atmospheric Administration (NOAA) reported that there were 100 cooling degree days (CDDs) last week compared to 80 normally and 90 the previous week, noted Lehman Brothers Analyst Thomas Driscoll. The forecast for this week is 67 CDDs -- 33% less than last week. Normal weather for the remainder of August and September would yield 70 CDDs two weeks from now; followed by approximately 10% weekly declines as the weather cools, said Driscoll. As a result, it is unlikely that such a storage event will be seen again this season.
He also added in a research note that he was "troubled" by the storage report. "The 77 Bcf drop from the 80 Bcf reported the prior week was partly due to hurricane-induced production problems which reduced production volumes by an estimated 10 Bcf and partly by additional gas that was consumed to meet peak air-conditioning needs (which we estimate added about 10 Bcf to demand) given the extremely hot weather," he said. "We are troubled by the source of the remaining 57 Bcf decrease in the reported injection. The 'missing' 57 Bcf is a huge 15%-17% of weekly demand."
Driscoll said the weekly change in the injection rate (of 77 Bcf) is more than twice as high as was seen previously in an off-peak period. Injection rates have been within 10 Bcf of prior weeks over 50% of the time, and within 20 Bcf of the prior week 98% of the time, he said. The change from the previous week was never more than 41 Bcf.
However, Ron Denhardt, a consultant with WEFA Inc., calculated that the increase in power generation last week over the previous week was sufficient enough to increase gas consumption by 64 Bcf. The AGA number is "plausible," said Denhardt. "Generation [nationally] was up 6,406 GWh from the previous week, according to the Edison Electric Institute," Denhardt noted. "With a 12,000 Btu/kWh average heat rate, that's 64 Bcf if it's all gas-fired generation being added. Some of that generation obviously was coal-fired and some was nuke and some was gas at a higher heat rate, but it could be enough to make the difference."
Denhardt said if 64 Bcf of additional gas consumption was present in the market last week compared to the previous week and if Tropical Storm Barry knocked out 13 Bcf of supply in the Gulf last week, that would be enough for storage injections to fall 77 Bcf from the week prior. "It's plausible that's what happened. It also could be a data problem," he said.
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