As shoulder-month natural gas futures prices soared past $6 last week, some market bears lambasted producers and analysts for a “propaganda campaign” that has “exaggerated” the low gas supply situation and the need for gas demand destruction this year (see NGI, May 12). The bears believe that it’s only a matter of time before the market realizes the folly of being at these prices during a shoulder month in a struggling economy. That realization may have started to take place last Thursday when prices began to tumble but stalled just above $6.

“These people are like used car salesmen,” said one buyer, regarding producers that have been outspoken about the North American gas supply situation. “They are out there saying ‘we’re running out of gas, and we’re the only ones that can find it, so buy our stock.'” The buyer didn’t want to be named, fearing some of his suppliers might raise his prices even more.

The Energy Information Administration’s David Costello admitted that there often is a striking difference between what is reported by some analysts and producers and what EIA data show. “A lot of these other [analysts and producers showed productive] capacity falling in 2002 more than what we would say, and then again in 2003,” he noted. There has been a big debate about supply. EIA data show production fell 1.8% last year in contrast to the 5% declines reported by some analysts.

But Costello said buyers should take note of the large increase in demand from the industrial sector last year, the current level of gas in storage and the “hundreds of thousands of megawatts” of new gas-fired power generation that are in the marketplace.

The EIA said in its most recent Short Term Energy Outlook that gas production actually is expected to increase by 6.6 Bcf/d (240 Bcf/year) this year compared to last. It also said, however, that gas demand will fall by 5.2 Bcf/d (190 Bcf) to allow utilities to fill storage, which is 40% below the five year average and was at a record low at the end of last month.

“You can’t treat all this as a function of supply being down, although it certainly was down in 2002,” said Costello. “We suggest that there will be a modest increase in production this year. There’s enough [productive] capacity for some growth, maybe not a whole lot in the short term but still it’s not consistent with the notion that we have a lot of downward pressure on supply.

“But it may be irrelevant if there is too much demand pressure. I would be flabbergasted personally to see storage to fall below 2,500 Bcf [on Oct. 31]. It will be in a normal range. About 2,800 Bcf would be the low end of the reasonable range — maybe 2,700 Bcf, but much below that and you could think of a lot of peak demand situations in the winter that would knock the hell out of that.” Gas utilities simply won’t allow that to happen, he said.

The factor that many market observers, including EIA, missed last year was the 4% increase in gas demand. If utilities are going to fill storage, they are going to have to bid high enough to limit demand from industrial users and power generators and that should keep prices “near $5” this year, said Costello, with winter price spikes much higher than that.

“We have recognized that industrial demand has to go down; it’s not going to be able to rise like it did in 2002. Our projections show industrial down marginally. You can’t have higher demand numbers if we don’t get some larger increases in supply. If we end up being flat in supply, we may have to kill 200-300 Bcf of demand (5.5 Bcf/d-8.2 Bcf/d),” Costello admitted.

Despite the dire circumstances, Tom Saal, futures broker with Commercial Brokerage Corp. in Miami, said much of it has already been priced into the market. He’s expecting the market to begin a new downtrend once storage injection numbers start to get bigger.

“I think once we get a couple of good injections, better than what we saw last week (80 Bcf), like 90 Bcf or higher for a couple weeks in a row, I think that the market will start saying [that it’s time for a change],” he said. “Once we start injecting numbers higher than [the average amount it would take to get storage above 3 Tcf by next November], then I think we’ll start to see the market [turn downward].”

Kyle Cooper, futures analysts with Citigroup, agreed there was a possibility, despite Monday’s surge above $6, that prices will fall in response to rising injections and production this year. However, he doubts prices could ever return to the levels seen in the late 1990s. “I think those ($2.50-$3/MMBtu prices) are long gone. We do not feel that production is falling as much as other people are hyping it. The broad-based measures just simply don’t support that.

“But on the flip side, storage levels are pretty low, and we have to fill those caverns before next winter. If we continue to have problems in the nuclear industry, and it’s hot in major gas consuming regions…, a case could be made that we don’t inject much more than last year and that’s not enough.” It’s that uncertainty that will keep upward pressure on the market, he said.

Another market analyst pointed out that the predicted decline in Canadian gas for export also could be a factor. For the 15 years prior to last year steadily rising imports from Canada filled in the gaps in U.S. supply.

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