A cold start to the winter season could snap natural gas storage inventories lower and send prices higher, but it will take a lot more to bring the overflowing storage situation back to a neutral level, Barclays Capital analysts said late Tuesday.

James Crandell, Biliana Pehlivanova and Michael Zenker, writing in Barclays’ latest Natural Gas Weekly Kaleidoscope, said over the five-month withdrawal season of November through March, average winter temperatures in recent years have been 6.4% warmer than the 30-year average, which has resulted in fewer heating degree days.

Only a 10% colder-than-normal winter over the 30-year average, they said, would bring storage balances “back to still near-record levels of last year.”

If storage at the end of winter heating season is near last year’s levels, gas prices could push above $5.20/MMBtu in early 2010, said the Barclays team. But they warned that even if cold weather sends prices higher, “there remains the risk that the persistent price strength limits the competitiveness of gas compared with coal.”

For the market to avoid a record storage finish in 2010, “gas must compete with coal next year to boost gas burns in the power sector,” said the trio. “Thus, the longer gas prices are held higher owing to cold weather, the more risk there is that storage injections build at an even higher rate than we expect with our 2010 price outlook, creating greater downside risks” in the second half of next year.

“In other words, a cold-weather-driven price surge should be self-correcting later in 2010 if the price strength remains.”

However, an “average” withdrawal would leave gas inventories “very full,” said Crandell and his colleagues. With a range of nearly 1,000 Bcf between the high and low in their withdrawal season forecast, “there is clearly a lot at stake in winter weather variation.”

Only a gas withdrawal of more than 2,300 Bcf this winter “would bring inventories in-line with normal end-March levels, an occurrence that has happened in just two of the past eight winters, when cold weather coincided with a tight market.”

The March-April spread currently “is trading around zero, implying the market is oversupplied and giving the perception that even if cold winter temperatures do materialize, the market has a surfeit of gas available,” the analysts said. Prices thus “have limited upside potential this winter on account of weak underlying demand. Temperatures would have to be much colder-than-normal…on a consistent basis to pull inventories out of oversupply and to normal levels.”

At current forward curve levels, gas prices “would encourage power generation from coal at the expense of natural gas and provide attractive economics for producers to rekindle drilling — factors, which would, in turn, push prices lower.”

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