Analysts from WEFA Energy and UBS Warburg yesterday joined manyother energy experts who have sent out warnings this week thatthere is an increasing possibility that the gas industry will facesupply shortages later this winter because of continuingcolder-than-normal weather and large storage withdrawals.

“It is difficult to identify how the market is going to avoidrunning out of gas without much higher prices and/or involuntarycurtailments unless we have extremely warm weather,” said WEFA’sRon Denhardt. “Any one power plant that could switch to residualfuel oil has probably already done so. In order to end the heatingseason with 500 Bcf in storage it will be necessary to have somecombination of supply increase or demand decrease that adds up to 6Bcf/d. We simply cannot determine how this will happen.

Denhardt said even if a huge 4% increase in U.S. productionoccurs during the remainder of the heating that still would accountfor only 2 Bcf/d, and it is very unlikely to occur. “If you assumeyou lose half of the fertilizer industry (0.8 Bcf/d) and some otherindustrial gas consumption, you may get 1.2 Bcf/d. This all adds upto 3.2 Bcf/d, far short of 6 Bcf/d,” Denhardt added.

“The numbers tell us that prices of $9/MMBtu at Henry Hub appearto be much too low..,” he said. “In fact it is difficult todetermine what price will be high enough to balance the marketunless we have extremely warm weather. Further, the problem is moresevere than prices there is a serious question of the adequacy ofsupply at any price this winter.”

Denhardt predicts next week’s storage report will show anotherwhopper withdrawal of 180 Bcf for the week ending today. That wouldleave working gas levels, according to the American GasAssociation, at 1,933 Bcf, which would be 637 Bcf, or 25%, lowerthan last year and 131 Bcf, or 6%, below the lowest level in fiveyears. “[W]e project that is not enough gas in storage to getthrough the heating season,” said Denhardt. “Others have come tothe same conclusion.” The lowest level of working gas storage inrecent history is 559 Bcf. “We are projecting working gas storageat 510 Bcf on March 3 and -120 Bcf at the end of March,” he said.

Earlier this week, analysts at Salomon Smith Barney (SSB) andRaymond James and Associates came to similar conclusions (see DailyGPI, Dec. 19). Raymond Jamescalculated that given normal weather for the rest of the winter,storage levels would have to fall to a “completely unfeasible” -280Bcf of working gas by April 1.

“Keep in mind that we have never really tested the gas storagesystem below +600 Bcf,” Raymond James said in a research note.”This means gas prices must continue to rise sufficiently throughthe second half of the winter to discourage between 5 and 10 Bcf/dof demand in the final 90 days of winter.” In other words, the U.S.will “likely see some form of price driven rationing” of gas in thesecond half of this winter. However, Raymond James’ projections ofstorage withdrawals for the next 13 weeks are substantially higher(62 Bcf/week higher) than the five-year average.

SSB warned of potential gas shortages, too (see Daily GPI, Dec. 21). “We would reiterate ourassessment that if this winter turns out to match the 10-year average,then storage levels should exit the winter at no more than 600 Bcfcompared with 1,000 Bcf this year at the end of March, although thecurrent year-over-year deficit is now 630 Bcf,” SSB energy analystsRobert Morris and Michael Schmidt said. “We believe that total naturalstorage levels cannot be drawn down to below 500 Bcf due to physicallimitations, which, if the winter maintains its current course, couldresult in physical shortages of natural gas near the end of thisseason.”

Ronald J. Barone of UBS Warburg joined the crowd yesterday,saying working storage levels probably would fall to 517 Bcf byApril 1. “However, given underlying demand creep, the chillyweather outlook (and the fact that three of the prior six yearswere very mild), we cannot rule out an exhaustion of supplies byApril 1st.” Barone noted that so far this winter temperatures havebeen 35% colder than last year and 15% colder than normal. “Withthe arrival of yet another arctic wave, overall wintry weathershould persist heading into the New Year.”

Barone also said that if gas prices remain at current recordlevels or if they increase, there could be a push for some form ofrenewed government oversight of the gas industry.

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