The natural gas storage deficit compared to last year continuesto grow at an alarming rate, prompting Salomon Smith Barney (SSB)to warn yesterday of potential gas shortages by the end of thewinter heating season.

The American Gas Association (AGA) reported another massiveweekly storage withdrawal yesterday. For the week ending Dec. 15,working gas levels in storage fell 158 Bcf compared withwithdrawals of 116 Bcf during the same week last year and 85 Bcfduring the same week in 1998. Despite the large number, the reportwas in line with expectations because temperatures last week wereroughly 21% colder than the same week last year and 15% colder thanthe 10-year average. Nevertheless, gas storage levels currently are630 Bcf, or 23%, lower than one year ago and are at record lowlevels for this point in the season, Salomon Smith Barney said inits weekly market summary.

“We would reiterate our assessment that if this winter turns outto match the 10-year average, then storage levels should exit thewinter at no more than 600 Bcf compared with 1,000 Bcf this year atthe end of March, although the current year-over-year deficit isnow 630 Bcf,” SSB energy analysts Robert Morris and Michael Schmidtsaid. “We believe that total natural storage levels cannot be drawndown to below 500 Bcf due to physical limitations, which, if thewinter maintains its current course, could result in physicalshortages of natural gas near the end of this season.”

Current weather conditions indicate continued unseasonably coldtemperatures across the central and eastern U.S., with no warmingtrend expected through year end, SSB noted.

During the first six weeks of the traditional withdrawal season,temperatures have averaged roughly 21% colder than the 10-yearaverage and 35% colder than last year. “The pattern so far thisseason of periods of moderation towards normal temperaturesfollowed by drops to below normal caused by the intrusion of arcticair masses appears likely to continue, keeping heating demand atunseasonably high levels,” the analysts said.

Wellhead supply, however, is still lagging. Salomon SmithBarney’s Oilfield Equipment and Services analysts Geoff Kieburtzand Mark Urness project a 31% increase in the domestic gas rigcount to an average of 1,200 rigs in 2001, concurrent with aprojected 19% increase in North American E&P spending (seerelated story this issue). Morris and Schmidt said that predictionis “consistent with our previous assessment that the continued risein drilling activity will result in a 5.7% increase in domesticnatural gas production next year after a more than 2.5% drop thisyear.”

SSB expects winter weather and deliverability constraints toproduce continued extreme volatility in the market. “At thisjuncture, we believe that our $4.25/MMbtu composite spot forecastfor 2001, which was our ‘worst case’ scenario if Mother Naturedelivered another record-warm winter, will need to be revised,” theSSB analysts said. Composite spot prices average about 15 centsless than Henry Hub spot prices.

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