With natural gas futures bouncing around $6s and even threatening to break the psychological $7 mark, many market watchers are wondering why prices remain elevated despite comfortable storage levels and near record rig counts.

With high prices forcing some natural gas customers to look for alternatives, consumer usage statistics over the last four years show fluctuating demand levels, with 2004 lagging 2003 demand to date. As production, weather and prices have varied over the past few years, so too has usage. According to an Energy Information Administration (EIA) study, the U.S. consumed 23,333 Bcf in 2000; 22,239 Bcf in 2001; 23,018 Bcf in 2002; and 21,937 Bcf in 2003.

At 5,103 Bcf for the first two months of 2004, the EIA said that U.S. consumption placed behind the 5,156 Bcf in 2003 at the same point in the year, but ahead of the 4,731 Bcf recorded in the similar 2002 period.

The high prices continue despite near record drill rig activity. For the week ended June 4, Baker Hughes said the North American natural gas rig count dropped four rigs from the week before to notch 1,008 active gas rigs. Despite the slight drop, the current activity is still 116 rigs higher than the same week last year.

And, in fact, the total U.S. oil and natural gas rig count of 1,168 for the week ended June 4 was significantly higher than the same week during the last 14 years except 2001, when the drilling frenzy pushed the count up to 1,270.

The natural gas storage situation currently is also more than stable. After an 87 Bcf injection was recorded for the week ended May 28, current stocks now sit just 8 Bcf below the 1,572 Bcf five-year average and 365 Bcf higher than levels recorded last year at this time.

“Based on current storage balances, our calculations suggest that the industry will require an injection pace of 10.2 Bcf/d to get supplies to a very solid comfort level of 3,150 Bcf by Nov. 1, 2004,” said UBS analyst Ronald Barone. “We view this as relatively bearish when compared with the 12.5 Bcf/d actual injection rate last year, but relatively bullish when compared with the 9.7 Bcf/d actual 10-year average.”

He noted that assuming normal weather and the 9.7 Bcf/d 10-year historical going forward injection rate from current levels, supplies would approximate 3,071 Bcf by Nov. 1, versus 3,155 Bcf at that time in 2003, 3,145 Bcf in 2002, 3,152 Bcf in 2001 and the overall 10-year average of 3,023 Bcf.

Despite all of the relatively bearish news, weather and the hurricane forecast remain as key focal points for bulls. Multiple weather forecasting companies continue to call for a toasty summer (see NGI, May 31), which when tied to active hurricane forecasts (see NGI, May 24), might not allow a significant gas price retreat for some time.

“Reflecting unseasonably warm conditions in the South east/central regions (and the continued modest numeric base), national cooling degree-day temperatures were 27% warmer than normal and 41% warmer than last year for the week ending May 29, 2004,” Barone said. “Season-to-date, cooling degree-day temperatures are averaging 48% warmer than normal and 30% warmer than last year.”

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