Had the cold weather of the last couple weeks not arrived, the gas storage surplus compared to long-term historical averages would have swelled to “well over 500 Bcf.” As a result, gas market bulls have “dodged a bullet” at least temporarily, according to consultant Stephen Smith of Stephen Smith Energy Associates.

Smith said it would only take one or two mild weather weeks in an otherwise normal January to push the storage surplus (compared to 1994-2003 norms) to more than 500 Bcf.

“We believe that the current storage surplus qualifies as being excessive unless the first quarter turns out to be considerably colder than most if not all current weather forecasts,” Smith said in his Weekly Gas Outlook. “The current price appears propped up by ‘early winter euphoria,’ a market perspective with a well established track record of trumping the ‘excess storage worriers,’ at least until late January.”

The winter euphoria perspective probably will gain even more support with this week’s gas storage report. Last week was by far the coldest week of the heating season with 11% more heating degree days than normal (since Sept. 10, there have been 11% fewer HDDs than normal). Smith said he’s expecting a storage withdrawal of 176 Bcf for the week ending Dec. 24, compared to a 123 Bcf withdrawal in last week’s report. Working gas levels are expected to fall to 2,851 Bcf, decreasing the seasonal storage surplus to about 428 Bcf, according to Smith’s 1994-2003 “norm.”

“If the tight post-2002 gas markets were to require 200 Bcf more than the 10-year norms in storage at all times throughout the year to provide an adequate cushion, then the current storage surplus would only be a 228 Bcf surplus,” Smith said. “If this were then further reduced by another 20 Bcf to approximate the remaining forward missing Ivan gas effect, then the current surplus would be 208 Bcf.”

To eliminate that 208 Bcf “new basis surplus” entirely between Dec. 24 and March 31, average gas heating weighted HDDs for the entire country would have to be 1.24 HDDs per day higher than normal, he said. “This is possible but has fairly low odds based on the most recent Jan/Feb/Mar forecast of the [National Weather Service].”

Assuming normal weather through January and barring a major oil supply disruption Smith is expecting Henry Hub prices to fall to between $5.50 and $6.00.

Lehman Brothers analyst Thomas Driscoll said he is expecting working gas levels in storage to end the withdrawal season at about 1.55 Tcf if the weather for the remainder of the heating season is about the same as the average weather over the last five years. If the weather turns out to be normal, Driscoll predicts that storage will end the season at 1.25 Tcf, compared to an average of about 1.1 Tcf over the last five years.

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.