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Storage Lingers as Winter Wanes

Storage Lingers as Winter Wanes

As the winter that wasn't winds down, gas in storage will have to come out like a lion during March if capacity holders are to meet cycling requirements. Even if temperatures remain warmer than normal the market should expect six weeks of relatively strong withdrawals because many storage capacity owners must bring levels down to about 25% full.

Right now levels nationwide are about 55% full, according to the American Gas Association, following a week when 97 Bcf came out of the ground. A year ago at this time, storage was 42% full. The current year-over-year storage surplus is 442 Bcf.

In order to exit the current heating season with the same amount of stored gas as last year (1,006 Bcf), the next five weekly withdrawals will need to average about 157 Bcf, noted PaineWebber in a research note.

Speaking last week to the National Association of Regulatory Utility Commissioners (NARUC) in Washington, D.C., J. Michael Ripley, director of gas operations for the Columbia LDCs, expressed concern about the current high level of gas in storage and difficulty LDCs will have meeting their cycling requirements come April 1.

LDCs have attempted to minimize the impact of 16% warmer-than-normal temperatures this winter by exercising swing options in their supply contracts, curtailing gas buying, and not withdrawing gas from storage. Where possible, they've packed more gas in the ground, too. Ripley said February, typically the coldest month, saw net injections at Columbia Gas of Ohio.

"I feel safe in saying our position probably isn't a whole lot different than a lot of other local distributors." During the 1993-94 winter at the same point in time, storage inventory at Columbia of Ohio was 27% full. As of Feb 17, Columbia had "47% of our inventory still remaining in the ground. But we still have a turnover requirement that requires our inventory to be down to 25% full or less by April 1," Ripley said. "We're going to be challenged to meet that if we have weather that is warmer than 10% warmer than normal in the month of March."

At least one trader speculates utilities will use storage gas next month in order to hit minimum withdrawal requirements and avoid penalties. "It is a bull market right now, but with a floor. People will buy cheap gas but only to a certain level before they hit their storage gas. We're seeing this floor during the month [of March] at about $1.65. While a lot of the gas in storage is $2.00 gas, it is probably cheaper for utilities to use it up and meet their requirements, rather that paying the penalties." Another trader said storage capacity holders not forced to empty out in the spring should be injecting cheap gas now to sell in the forward futures months. That's what another trader was doing. And someone else said the market has been widely aware of the storage overhang for so long that it's probably been factored into prices, which won't go much lower because of it.

Storage caverns will have to do some heavy puffing if levels are to get down to where they were at the end of last year's hearing season, about 157 Bcf/week, noted PaineWebber. "Given the mediocre weather outlook and the fact that last year's average comparable going-forward weekly withdrawals averaged 68 Bcf, it is likely that a significant amount of the current 442 Bcf storage surplus will remain come March 31."

It is apparent from a transportation report earlier this month by ANR Pipeline that it has been carefully eyeing storage levels on its system. "Abnormally high storage inventory balances and overall storage operating concerns" caused the pipeline to continue limiting interruptible injections under rate schedules DDS and MBS. These customers were told they have until April 1 to draw down existing account balances to zero. Following that announcement, a Midwest trader said the move by ANR was unusual and that the pipe usually just halts injections.

At the end of January, ANR entities ANR Pipeline, ANR Storage, Blue Lake Gas Storage Co., and Steuben Gas Storage Co. combined had customer storage of 129.7 Bcf (62% full), compared to 104.7 Bcf (50.3% full) a year earlier, said ANR spokesman Joe Martucci.

For those fretting over excess gas in the ground, today's Salomon Smith Barney (SSB) Weekly U.S. Natural Gas Storage Withdrawal Forecast brings some welcome news. SSB lowered its end-of-season storage forecast by 15 Bcf from last week's forecast to 1,408 Bcf. Still, that's 349 Bcf above last year's end-of-season level and 547 Bcf above the four-year average. "If our forecast overhang remains this large, we would expect producers to lower prices in order to induce additional consumption and allow storage withdrawal rates to pick up. We experienced 12% warmer-than-normal weather last week. The draw of 97 Bcf was in line with the 98 Bcf we would have forecast based solely on the weather and was 15 Bcf more than our forecast, which had assumed 25% warmer-than-normal weather and an additional 20 Bcf of non-heating driven demand." The previous SSB forecast, dated Feb. 19, projected end-of-season inventory of 1,423 Bcf.

Joe Fisher, Houston (Other NGI staff members contributed to this report)

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