Declining availability of hydroelectric generation in the West and the larger than normal discount for natural gas compared to Gulf Coast distillate fuel, propane and NGLs will contribute to the narrowing of the storage surplus in the weeks before the Nov. 1 start of the winter season, according to analyst Stephen Smith. Nevertheless, Smith is predicting storage stocks on that date (sans hurricane interruptions) will total about 3,200 Bcf, above the 3,030 Bcf average for Nov. 1 over the last 10 years.

“We have seen a large part of the summer/fall hydro decline already, but there is still more to come,” Smith wrote in his Weekly Gas Outlook. And he said that between 85-90% of hydropower is typically replaced by natural gas-fired generation.

Also, “with the current distillate/gas spread of $2.76/MMBtu, any user of No. 2 fuel oil that can switch to gas will do so. In addition, propane prices are now $3.90/MMBtu in excess of Henry Hub gas,” Smith said, encouraging the extraction and separate sale of the liquids.

While the weekly average Henry Hub price decreased by 11 cents to $5.55 last week, weekly average distillate prices increased by 5 cents to $8.31/MMBtu, decreasing the gas-to-distillate price ratio from 69% to 67%. The normal equilibrium is in the 80-90% range “in snug, but non-crisis markets.”

While mild weather is likely to continue to build to the storage excess through Aug. 20, Smith sees the surplus being whittled away after that, from about 240 Bcf on Aug. 20 to 170 Bcf by Nov. 1. “We see a Nov. 1 cushion of about 120 Bcf versus 10-year norms as the ‘comfort level’ required by a nervous market. On this basis our projection of a 170 Bcf surplus for Nov. 1 appears about 50 Bcf long relative to a 120 Bcf target. In absolute storage terms, we are projecting 3,200 Bcf for a Nov. 1 storage level as compared with a target of 3,150 Bcf.”

This base case (sans hurricanes) would lead to prices of between $5.10-5.50/MMBtu for the close of the October Henry Hub contract in late September, Smith estimated.

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