After remaining for more than two months in a range of 350-400 Bcf, the natural gas surplus finally has begun to show signs of yielding to a combination of “relentless” summer heat, a continuing production decline and a positive demand response and “steady trend” toward a higher oil-to-gas price ratio, said an energy analyst Monday. However, the return to “tight gas markets” may not occur until “some point in 2003.”

In the latest Monthly Energy Outlook, energy analyst Stephen A. Smith noted that in the four weeks that ended Aug. 9, the natural gas surplus had declined to 260 Bcf from 360 Bcf, in a time when temperatures were 10% warmer than normal. However, in the four weeks before that period, temperatures were actually 21% warmer than normal, yet gas surplus only declined 23 Bcf.

“Optimists would argue that an accelerating production decline is clearly driving the recent surplus decline,” said Smith. “This may well be. But our 2Q 2001 vs. 1Q 2002 production surveys showed only a 0.3% sequential decline.” Therefore, Smith noted that he “would be reluctant” to be too enthusiastic about the surplus gas inventory reduction achieved over the last few weeks.

Even with a normally hot August, natural gas for September generation tends to drop a net of 4 Bcf/d with adjustments, he said. “This net loss of demand would roughly offset the surplus reduction pace of the past few weeks. Our balance for the next 10 weeks suggests that gas inventory will be very close to storage capacity at the normal end of the ‘build season’ (Nov. 1),” pointing to 2003 before storage levels are tighter.

Smith found that in the past five weeks or so, the pace of surplus reduction has accelerated, but natural gas prices have “barely begun to acknowledge this fact.” Although there are several uncertainties from the unusual storage pattern, Smith said that his conclusion might not be as strong, but remained valid.

“Enthusiasm over a strong inventory performance in a hot August should be tempered by the ‘September effect’ — gas demand declines significantly in September as the summer heat eases, but the fall cold weather has not yet arrived. Considering this effect, we conclude that odds still favor reaching the end of ‘build season’ on November 1, with gas in storage very near capacity.”

The full energy report may be found on the web site at www.stephensmithenergy.com.

©Copyright 2002 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.