There is a growing consensus among market observers that working gas levels in storage could fall sharply this winter possibly to near historic lows by April, but several veteran industry analysts warn against crying “the sky is falling” too soon. They say the current amount of working gas in storage appears adequate to handle this winter’s demand, particularly when compared to average storage levels in the mid-1990s.

The Energy Information Administration (EIA) reported that there was 2,331 Bcf of working gas in storage on Jan. 3, which was 459 Bcf less than levels on Jan. 4, 2002. But veteran analyst Stephen Smith of Stephen Smith Energy Associates in Natchez, MS, cautioned against the tendency to compare current levels to levels last year or even to the five-year average.

“If you are asking the question ‘how much gas do I need to meet the typical winter,’ we had better focus on more what the typical level of inventory is, not just some aberration caused by mild temperatures last fall and winter,” said Smith. “That was an accident of nature. Why compare against an accident of nature that happened to put way too much in storage last year? It would be better to compare against some norm that is more useful in relation to what you might expect demand to be. It’s a choice between whether you want to define the question properly and lead or be knee-jerked the way Nymex [traders] are.”

Smith said weekly working gas levels between 1994 and 1998 inversely correlate extremely well with spot prices over that period. In addition, there was a significant shift to a tighter supply-demand balance after 1998, he said. “I felt that the 1994-98 period was a period in which there was ample supply and what you were getting was not any shortages imbedded [in the storage data]. Before 1998, the storage data wasn’t messed up by the fact that the capacity to produce was starting to be insufficient.”

Smith said he estimates 2002 gas production was down 5% from 2001. However, using his mid-1990s average for storage levels, he calculates a current storage surplus of about 128 Bcf over those levels.

The American Gas Association used a three-year average with which to compare current levels because AGA officials believed it more accurately reflected the changes in the marketplace, with a larger number of marketers holding storage capacity in recent years. International Gas Consulting (IGC) in Houston conducted a study for AGA in 2001 on the issue.

It showed at the time that 73.3% of storage capacity was contracted to local distribution companies (LDCs), 8% to pipelines and 15.3% to marketers, the latter mostly in the production area. At that time, however, marketers controlled an additional 23.8% of the LDC-contracted storage capacity through asset management agreements.

“You have to look at who’s participating in the storage,” said Rusty Cates, vice president of IGC. “A year ago I would have agreed that you need a recent average with which to compare current storage levels” because marketers recently amassed large quantities of storage and used it for arbitrage. But that’s not the case since the fall of Enron.

Since the decline of the marketers, most asset management agreements have been discontinued and much of that capacity has been turned back to the LDCs, he said. “Assets that were in marketing hands are now back with the LDCs” which historically use it for winter gas supply. Cates agreed that it makes more sense to include earlier years in comparison to current levels and pointed out that the situation today is right in the middle of the storage levels recorded at the same time over the last nine years (see Daily GPI, Dec. 20, 2002).

EIA’s Bill Trapmann said the EIA’s selection of a five-year average for its weekly report also was somewhat arbitrary. “We use it because it’s very transparent in the sense that it’s well understood.” He said a 10-year average was ruled out because of the market changes brought on by FERC Order 636 in 1993. “This is not a question of right or wrong by any means,” he said. “We had to use something, and I can appreciate analysts looking at things in a different way. That’s why every week we have a link to the entire database of weekly data. There are nine years of weekly information for people to enjoy and exploit.”

Whatever you consider normal for storage at the end of the withdrawal season, working gas levels this winter could drop below it, several industry experts have said recently. The EIA forecasts gas stocks will be down to 1.11 Tcf by the close of the first quarter, significantly lower than the 1.52 Tcf level reported at the end of the three-month period a year ago. Analysts at Raymond James and Associates expect storage to reach record lows this winter (see Daily GPI, Dec. 24, 2002).

However, Cates said that while supply is a concern, he thinks storage will be sufficient to serve demand this winter. “Historically, the lowest we’ve gotten is 500 Bcf; out of 3.5 Tcf, that’s one-seventh, so that’s not too bad if we go that low. There could be some regional supply disruptions, and the last gas out doesn’t flow as fast, but we should make it through the winter,” he said. Next summer and beyond, however, with declining production, the need to refill storage and the increased power generation load are likely to cause problems. Cates predicts prices will stay strong through the summer.

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