Unlike the sharp drop and subsequent recovery of natural gas storage stocks in the winter of 2000-2001, today’s low storage levels may be a continuing phenomenon, analyst Stephen Smith said, indicating “embedded tightness” in the system.

The price rise to $6 over the last month “was due in large part to the persistence of this 310-390 Bcf deficit [compared to mid-1990s levels] for the last 13 weeks.” Smith, of Stephen Smith Energy Associates, calculated the deficit total using the years 1994-98 as a base because that time period did not include extreme price spikes. The January 2001 deficit “was ‘V-shaped,’ whereas the current deficit appears to be ‘U-shaped’ and we are still forming the bottom of the U. This implies the first shortfall was correctable once the severe winter weather eased, whereas this deficit is more durable due to ‘imbedded tightness’ in the system.

“To ‘bid away’ sufficient spring/summer gas demand to allow gas storage to reach minimum necessary levels by next Nov. 1, we believe that a $5.00-$7.00 Henry Hub trading range will be required,” Smith said. As current demand is priced out of the market, storage injection numbers should rise “and this in turn will put some pressure on the $6 gas.”

Smith estimates the storage fill for last week, which will be announced Thursday, will be 97 Bcf. His prediction would have been higher — 120 Bcf — if the heating degree days (HDD) for the week had matched the norm for this year of 30 HDDs. Instead, the unending winter notched 45 HDDs (weighted by gas-home HDDs). The winter from Oct. 4, 2002 through May 23, 2003 has been 3.3% colder than normal.

Smith, who started as a chemical engineer with several oil companies, was a Wall Street oil analyst for fifteen years for Dain Rauscher Wessels and Bear Stearns and has engaged in analysis of the energy industry for 35 years. His focus is mainly on exploration & production companies, but he claims his methods are different from the standard Wall Street approach. Smith is avoiding short-term analysis and churning, looking to discover who in the industry is most likely to create long-term per share value growth.

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