With the current difference between the injection season (May-October) futures strip and the futures strip for next winter (December-March) at only about 11 cents, something clearly has to give, Energy and Environmental Analysis Inc. (EEA) said in its Monthly Gas Update. Injection season-withdrawal season spreads are only about 3 cents currently, not even close to the amount needed to cover the cost of interruptible storage.

“In short the market says that putting gas into storage does not make economic sense. Is the market right? Or is this yet another example of a purportedly efficient market exhibiting irrational results? Time will tell but we think it is likely that many market participants will look back after the next heating season and wonder how they missed the obvious,” EEA said.

According to the Arlington, VA-based consulting firm, the forward market situation implies that some significant changes in the balance of supply and demand are going to happen in the next 24 months. Over the last five years the average seasonal price spread has been about 88 cents. To justify a spread that is less than 20 cents, at least one of three things has to occur: next winter has to be much warmer than normal (and it’s doubtful that everyone in the industry agrees with that prediction currently); gas deliverability has to grow significantly (EEA thinks moderate growth will occur this year); or demand destruction is going to lower injection season prices and widen the summer-winter spread.

The latter is most likely “where the sense of the market lies and is correct to a certain extent,” EEA said. “More gas-fired power generation will be online. However, with prices remaining near $6, those customers that can switch to oil will. In addition, at least some demand destruction will occur in the industrial sector at these prices.”

EEA expects summer gas demand from power generation will fall 1.9 Bcf/d from 2002 levels to 13.9 Bcf/d under normal weather conditions this year. In addition, EEA, as well as some other analysts and consulting firms, including Raymond James (see Daily GPI, March 18) and Fitch Ratings (see Daily GPI, March 6), are expecting industrial demand to fall due to price pressure. EEA sees a 1.1 Bcf/d drop from 2002 levels to 19.3 Bcf/d.

“We predict December 2003-February 2004 prices to be a full $1/MMBtu over the latest Nymex quotes (on April 15),” which comes out to about $6.80. “In our opinion, the current high prices are more a result of year-round supply tightness and not a result of a change in winter/summer dynamics,” EEA said.

“Overall, our conclusion is that even if gas is injected at $6/MMBtu, storage may be more valuable than what the Nymex is currently saying.”

EEA predicts that next winter under normal weather conditions prices at the Henry Hub (December-February) will exceed injection season averages by 53 cents and prices at Dawn will be 10 cents higher at 63 cents more than average injection season rates.

EEA believes next winter’s gas prices are likely to be about $1 higher than the current futures strip shows. The consulting firm also expects significant demand destruction to occur to allow the market to serve gas-fired power generation at the same time it needs to inject a record amount of gas into storage.

For more information on EEA, call (703) 528-1900 or go to www.eea-inc.com.

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