Futures traders were shocked by the second record weekly gas storage injection in a row last week, but at least one market expert is calling for a third record injection this week, which could send prices down much further.

It was ironic that just when Federal Reserve Chairman Alan Greenspan was busy mulling over his next speech on the natural gas crisis, the supply sirens and alarm bells suddenly were shut off, albeit temporarily, by a massive weekly storage refill and a one-day 9% drop in near-month Nymex gas futures prices. The 125 Bcf storage build for the week ending June 6 sent the near-month futures contract down 61 cents on Thursday to $5.606 from $6.213 a day earlier.

The Energy Information Administration (EIA) reported that working gas levels rose to 1,324 Bcf, or about 44% of the 3 Tcf needed by Nov. 1, which is 21 weeks away. The storage deficit compared to the five-year average fell to 446 Bcf. If the deficit were to fall at the same weekly rate, in 12 weeks storage would be back to average levels.

By Friday, the July futures contract had posted a low of $5.48 and had lost more than $1 of its value compared to a week earlier before a minor rebound back into the mid-$5.60s.

“What, have we gone from energy shortage to energy glut in just 24 hours?” asked futures broker Jay Levine of Advest Inc. “I expect Alan Greenspan will call a special hearing and do a Gilda Radner/Emily Litella ‘never mind.'”

It took futures traders all of one day last Thursday to recognize that “while there’s genuine (longer-term) concern over supplies, a generally mild/cool summer should not only help mitigate storage going into winter, but mitigate [major] summer price increases,” Levine noted.

Traders would have noticed the potential for a series of record natural gas storage builds had there not been “freakishly cold weather” along the whole East Coast and in the Midwest for part of May and June, said Stephen Smith of consulting firm Stephen Smith and Associates. Smith said with normal weather over the last five weeks instead of the cold weather, the storage deficit compared to historical averages would have fallen by another 100 Bcf.

“Traders tend to focus on the reality of the situation and don’t worry if it came as a gift from the weather gods or not,” Smith noted. “The frequent comparisons with last year’s record storage levels always strikes me as strange. Why would you do that? Why wouldn’t you compare current storage levels with more normal levels.” Smith compares current working gas levels with working gas levels in the mid-1990s (1994-98) to get an accurate reading.

With the potential for large injections being masked by cool weather, prices kept going higher and higher over the last month. “It reminded me of the little roller coaster car going up to the top with people kind of smiling saying ‘so far, so good.’ Same deal here. The cold weather was simply hiding the demand destruction,” said Smith.

Until last week, demand destruction was running at about 4 Bcf/d as compared to when gas prices were $3-4/MMBtu, according to Smith. But last week’s storage injection indicates that demand destruction suddenly soared to 7 Bcf/d.

“Last week (the week ending June 6) is hard to reconcile by any stretch,” he said. “Last week’s [storage and demand destruction] behavior was the kind of response you would get as if prices had hit $9 or $10. Demand destruction went to close to 7 Bcf.” Smith is considering the possibility that the EIA actually may have missed some data the prior week.

What made the record storage withdrawal that much more unusual was that it came during a week when the nation’s attention was suddenly drawn to a gas supply shortage by the Federal Reserve Board Chairman. “Usually about the time you recognize there’s a secular problem, some little blip happens in the short-term dynamics and it make the long-term case look temporarily out of whack,” Smith noted.

“I don’t think there’s any doubt that we have a long-term problem and that Alan Greenspan was right on the money, and we had better start giving some serious thought to figuring out ways to [increase supply].

“There’s a short-term equilibrium that’s going on here,” said Smith. “If gas gets too far out of hand, it can destroy enough of its demand to bring things back into balance for the short-term. If oil hangs out at $30, that’s effectively $5/MMBtu or $5.50. It says that gas is going to oscillate in the $5-7 range. It will work its way up to $7 when it looks like things are very short, will start destroying demand at $7 and then work its way back down to $5 and demand will start to be stimulated again.”

Whether gas drops below $5, he said, depends on whether crude prices fall below $28 and how cool the summer is going to be. If also depends on how rapid the storage refill continues to be. Smith predicts that the next gas storage injection could be even larger than the last one.

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