With gas storage levels in the United States and Canada well above historical averages and possibly approaching record highs, there will be increasing pressure over the next few weeks for gas prices to come tumbling down. Just how long they will remain down, however, probably depends on the weather and the price of crude oil, which could go to the moon based on action over the last few days, analysts say.

Despite 2.3 Bcf/d of Gulf of Mexico gas production remaining shut in during the week ending Oct. 1 due to damage from Hurricane Ivan, working gas levels in storage still managed to rise 81 Bcf, which was more than most market observers had expected. The EIA estimates that on Oct. 1 working gas levels rose to 3,092 Bcf, or 200 Bcf more than the five-year average and 188 Bcf more than the same time last year. The large and unexpected refill shows that weak market conditions more than offset the Gulf shut ins during the week.

Working gas levels in the Producing region are the highest that they have ever been at this point in the injection season since weekly storage data was first compiled in 1994. Producing region working gas rose 15 Bcf in the lastest report to 882 Bcf. The 10-year average of season ending storage levels in the Producing region is only 811 Bcf. Working gas levels in the West also are already above the 10-year average for season-ending storage levels.

“Based on current balances (and simply assuming the 6 Bcf/d 10-year historical going forward injection rate from current levels), storage supplies would approximate a substantial 3,273 Bcf by Nov. 1,” said UBS analyst Ronald J. Barone. “This compares with 3,155 Bcf at that time in 2003; 3,145 Bcf in 2002; 3,152 Bcf in 2001; the overall 10-year average of 3,023 Bcf; and the all-time record high of 3,254 Bcf set during the week ending Nov. 30, 2001.”

Meanwhile, Canadian Enerdata is reporting that working gas levels north of the border also are very high: nearly 100% full in the East region at 269 Bcf; 91% full in the West at 212 Bcf; and 93% full nationwide with 483 Bcf.

Canadian storage “is probably at least 100 Bcf higher than last year,” said Ron Denhardt. a consultant with Strategic Energy and Economic Research Inc. “Only about half of it is actually reported by Enerdata. There’s a lot of storage that’s not covered in the survey so there’s probably about twice as much in storage as Enerdata reports. In total it’s at least 100 Bcf higher than last year.”

Denhardt said market direction depends a lot on what is going to happen with Gulf shut-ins from Ivan over the next few weeks. “Assuming that a lot of it comes back, I would expect that by the time we get to [November] bidweek that there will be pretty strong downward pressure on prices,” he said. “The forward market is trading $1-2 above physicals right now; that’s pretty insane.”

He said if weather remains mild and production continues to comes back in the Gulf (see related story), by the time bidweek arrives in the cash market “it is going to be really hard to find places to put gas and that is going to put downward pressure on the physical market and that should pull down the forward market.”

However, the market direction for this winter is far less certain, he said. “Views have changed a lot about weather during the heating season. A month or two ago, people were talking about a weak El Nino and possibly a warmer than normal winter, but now [the National Oceanic and Atmospheric Administration] has changed that to colder than normal in the Mid Atlantic and South regions, and a lot of areas, including the Northeast could go either way. Warmer than normal weather is forecast for most of the West except the souther Rockies (see related story).

“If we get normal or colder than normal weather this winter with extremely high oil prices, I think we could have very high winter prices,” said Denhardt. “There’s near-term pressure to bring things down but this winter we could have some pretty tough going.”

He noted that natural gas prices last winter were about 30 cents less than West Texas Intermediate crude oil prices on a per MMBtu basis, and the gas market is even tighter this year. With $50/bbl oil this winter, that puts natural gas about $8.32/MMBtu.

“I’m not saying it will get to $8.32. I would expect oil prices to come down some,” said Denhardt. “I think we have been trading a lot on fear and speculation and hedge funds just having a place to put their money. The problem is that gas prices can pretty much go anywhere between resid and distillate and not make much difference in terms of demand so if oil prices hold the market can drive gas prices up pretty close to distillate and it won’t matter that much from a demand perspective. It’s possible we’ll hit those kinds of price levels.”

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