If April-June weather is roughly in line with the National Weather Service (NWS) outlook, U.S. natural gas storage may enter July down about 500 Bcf compared to a year ago — setting up the potential for double-digit gas prices this summer, according to one energy analyst.

Stephen Smith Energy Associates Inc. of Natchez, MS, detailed its expectations for gas prices in the coming months in its latest monthly outlook report. Smith’s analysis follows an NWS forecast calling for above-normal heating degree days (HDD) in key eastern and Midwest energy markets (see Daily GPI, March 31). The NWS also is calling for above-normal cooling degree days (CDD) “for regions in which gas-fired power generation [is] most important.”

Based on the NWS forecast and internal modeling, Smith analysts concluded that there is a potential for gas prices to hit $10-12/Mcf Henry Hub this summer — if the summer months are hot. Smith’s base-case outlook is “somewhat more moderate.” It assumes:

“This HDD/CDD scenario, along with other assumptions, leads to a projected storage surplus of 224 Bcf on July 4, which would be about 500 Bcf lower than the storage surplus of one year earlier,” Smith noted. The energy team estimates a late May gas-to-residual spread in the range of minus $1.75/MMBtu to minus 75 cents/MMBtu. An assumed New York Hub 1% residual price of $11/MMBtu for late May would imply a “likely June Henry Hub bidweek price range of $9.25-10.25/MMBtu (midpoint = $9.75/MMBtu).”

The June 2008 Henry Hub contract closed March 20 at $9.23/MMBtu, Smith noted.

“On Jan. 11, the gas storage surplus [over the five-year average] was 631 Bcf. By March 20, this surplus had declined by 261 Bcf to 370 Bcf,” and gas prices increased more than $1/MMBtu over the 10-week span, the Smith team noted.

Also playing into the gas storage and price picture is the decline in domestic liquefied natural gas (LNG) imports, said the analysts. As of March 20, LNG imports have averaged 0.7 Bcf/d this year, which is about 2 Bcf/d below year-ago levels.

“We expect to see a seasonal increase beginning in April but we remain doubtful that this year’s second quarter LNG imports will match the 3.1 Bcf/d average recorded for last year’s second quarter,” said the analysts. Last year’s spring and early summer surge in LNG imports to the United States “was due mainly to a spring 2007 European gas glut, which was the result of a very mild European winter. In sharp contrast the last few months have seen a comparative dearth of LNG imports because LNG netbacks to both Asian and European LNG markets have been substantially higher than those for U.S. markets.”

Total gas production also has been growing both on- and offshore for the past 18-24 months, according to the analysis. Gulf of Mexico (GOM) shelf production has declined, but there is higher gas output from the deepwater GOM and several other domestic unconventional resource plays.

“The strong 4Q2007 contribution from Independence Hub plus trend growth from gas shales (and other resource plays) should yield annual average per-day growth of about 3.1% in 2007,” analysts said. “For similar reasons we estimate 3.1% in U.S. gas production growth for 2008.”

The GOM’s growth in November and December came from Independence Hub output, which grew from 0.15 Bcf/d in June 2007 to 0.8 Bcf/d in December. In the final month of 2007 gas production from the GOM averaged 8.21 Bcf/d versus 7.31 Bcf/d in September 2007 (when Independence Hub ramped up), compared with an annual average of 13.48 Bcf/d in 2000.

Onshore, said the analysts, gas growth has been lifted by Texas’ output: production in only the Barnett Shale and East Texas plays last December was 17.86 Bcf/d, compared with an annual average of 14.43 Bcf/d for 2000. Louisiana production has trended down slightly. The analysis did not include the recent projections in the Haynesville Shale (see Daily GPI, March 26). Gas output in Louisiana last December was 3.62 Bcf/d, compared with an annual average of 3.98 Bcf/d. Wyoming, however, has shown gas gains, with December production at 5.33 Bcf/d, compared with an annual average of 2.97 Bcf/d for 2000.

©Copyright 2008Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.