The odds that had once favored a spring natural gas "mega-glut" have suddenly dropped to zero, and the late surge of extreme cold weather will impact North American gas markets through most of the year, Stephen Smith Energy Associates said Wednesday.

In the latest Monthly Energy Outlook, the energy consultant is now projecting a 1,412 Bcf storage level for the end of March, representing a surplus of 526 Bcf versus 10-year norms, compared with a surplus of 809 Bcf at the end of March 2006. At the end of January, Smith estimated a 1,715 Bcf season-ending storage level, or 19 Bcf higher than in 2006 (see Daily GPI, Jan. 31).

"While the potential forward impact of additional colder-than-normal temperatures is now waning, the effect of the last six weeks has been and will continue to be transformational for this year's gas market," the report noted. "The prospects for a spring storage mega-glut, one large enough to dampen gas prices for even the hottest of summers, have now vanished. The market will still encounter a moderate spring surplus, but one which is roughly 300 Bcf lower than existed at the end of March 2006.

"While not the most likely case, a summer as hot as last year could lead to a very tight summer and fall gas market. It is this possibility which has been gradually being added to the futures strip in recent weeks."

April Henry Hub bidweek prices are forecast to range between $6 and 7.50/MMBtu. The "base case" price outlook assumes West Texas Intermediate crude prices of $50-60 for "several" months, private service projections of heating degree days (HDD) through March 9, and near 10-year norms for HDDs thereafter.

Summer gas storage projections "remain on the high side (450-500 Bcf)," assuming 10-year norms for cooling degree days. "Even under this scenario, we expect third quarter Henry Hub prices to average almost $1/MMBtu better than last year. But if summer heat were to approach last year's extremes, and oil prices were to hold in the $55-65 range, there could be an exceptionally strong summer for gas prices," Smith said.

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