With working gas levels in storage at record highs, further declines in spot natural gas prices can be expected as the year wears on, according to FERC’s Office of Market Oversight and Investigations (OMOI).

“As the United States carries this very strong storage position [into] the spring and summer, we can see further weakening of prices,” said Stephen Harvey, deputy director of OMOI. “Certainly in the absence of strong weather-related demand, high storage inventories are likely to be the continuing factor in determining natural gas prices throughout 2006,” he said in FERC’s staff’s final market presentation of the 2005-2006 winter heating season.

Storage inventories are “very full” for this time of year due to the mild winter weather, he told commissioners during a regular meeting of the Federal Energy Regulatory Commission (FERC). The Energy Information Administration reported last week that storage was 664 Bcf above the five-year average, or 64% higher than normal, Harvey said.

The high storage level is creating competition between wellhead gas production and storage withdrawals, which is pulling down prices, he said. Harvey noted that natural gas prices have recently dipped below residual fuel prices in certain areas. “While gas prices falling below competing fuels is not a typical condition, I’ll restate what I said in January about the possibility. Then, I said, ‘I can conceive of a situation where this alternative fuel floor would not hold and gas prices could plunge if so much inventory was still in storage'” at the end of the heating season.

Spot prices are at about the same level they were last year at this time, according to Harvey. They skidded in late February and early March, reaching about mid-$6/MMBtu last week. On Wednesday, spot prices rebounded to $7.10/MMBtu for gas delivered to the Henry Hub, he noted.

The reduced prices are not being felt at the retail level, Harvey said. Distribution companies now are withdrawing stored gas that was injected last summer at prices that were much higher than current spot prices. “As a consequence, retail rates will not drop as fast as the wholesale prices have.”

The gas futures market is showing conflicting signs. While the spot market points to a drop in prices, the “futures markets are clearly assigning some possibility to price increases as 2006 continues,” Harvey said. “What is striking…is that despite recently similar spot prices at last year this time, the futures curve has risen from last year. We see that expectations for April 2006 are similar [to last year this time], but the rest of the curve has shifted out by about $3 next winter and a little bit more beyond that.”

Nymex gas futures, which closed on March 15 at $7.210 for April 2006 delivery, are projected to settle at $9.970 in December and at $10.620 in January 2007.

In addition to the bulging gas inventories, Harvey reported that recovery of Gulf of Mexico production that was shut in following the hurricanes last summer is occurring at a “considerably slow pace.” The Interior Department’s Minerals Management Service and Louisiana Department of Natural Resources have pegged shut-in production in the Gulf and Louisiana at less than 1.8 Bcf/d. He also said that imports of liquefied natural gas have remained “extremely weak.”

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