Analyst: Deliverability Turn-Around is Slow in Coming
Despite the large post expiration-day futures correction
downward last Thursday, prices rebounded some Friday and for good
reason, according to Salomon Smith Barney energy analyst Robert
"It still looks very tight. Our models that measure
deliverability show that even with continued rise in the rig count
if we get a normal winter it's going to be tough again next year,"
he said in an interview. "Even with another record warm winter
we're not going to come out with storage levels much different than
this year at the end of March."
The American Gas Association (AGA) reported last week that
storage injections for the week ending Sept. 22 were 77 Bcf
compared with 79 Bcf last year and 41 Bcf in 1998. The injection
was in line with Morris' expectations because of the weather, the
status of nuclear generation and wellhead deliverability, but the
injection report was on the high end of market and Wall Street
"Over the past twenty-one weeks, injections have averaged nearly
0.5 Bcf/d, or roughly 5% lower than last year," Morris noted in his
latest report on market fundamentals. "Consequently, overall
storage levels are 429 Bcf, or approximately 15% below one year ago
with only six weeks left in the traditional storage refill season.
This subdued pace of injections can primarily be attributed to a
drop in domestic production throughout most of this summer compared
with last year, in our opinion, although domestic production now
appears to be on the upswing given the rebound in drilling activity
"Over the past twenty-one weeks, temperatures (cooling degree
days [CDD] weighted by electric home cooling customers) have been
slightly warmer and nuclear supplies just over 3% greater than last
year. Consequently, storage levels remain on course to enter this
winter close to 2,600 Bcf compared with roughly 3,000 Bcf last
Temperatures early in the withdrawal season will be a key factor
going forward. Both the National Oceanic and Atmospheric
Administration (NOAA) and Weather Services International (WSI)
issued fall/winter weather outlooks recently declaring that La Nina
will be absent and that more normal temperatures will prevail this
winter, which means temperatures will be much colder than over the
past three winters.
"We see gas prices being strong through all of 2001 perhaps
beyond even if we have another record warm winter," said Morris.
"If you have a normal winter, things could get very interesting.
Gas prices could get even stronger and we could see some
"Our models show we would come out of the winter with storage at
about 600 Bcf versus 1,000 Bcf this year, and we know what 1,000
Bcf did to prices this summer," he said.
"Deliverability is starting to turn around. At this point with
the rig count above 800, deliverability is starting to turn but we
are way behind the eight ball, way behind where we were 18 months
ago and it's going to take a while to get it back up," said Morris.
He noted that the domestic natural gas rig count dropped two weeks
ago to 803 from 816 and rose by only three last week to 806. "Our
deliverability models assume that the domestic natural gas rig
count rises to 850 by year-end and subsequently to 900 by mid-2001.
"In the meantime, there continue to be increases in demand even
with these high prices. We're seeing some increase in demand from
the fertilizer industry and one area where demand continues to be
very strong is in the electric generation sector."