With the winter gas futures months holding attractive premiums for storage arbitrage, many forecasters are expecting the current 36 Bcf deficit compared to last year’s storage levels to be washed away today with the American Gas Association’s latest weekly report. Market soothsayers are calling for another 100+ Bcf weekly injection, which would make an unprecedented five in a row.

Over the last seven weeks, the storage deficit has fallen from 404 Bcf to its current level of 36 Bcf. A little more than seven weeks ago, analysts started getting signals that the deficit might be erased. Lehman Brothers Analyst Thomas Driscoll, for example, forecasted storage would reach full going into this winter (see Daily GPI, April 5; April 6). The view was thought of as foolhardy at the time by some observers (see Daily GPI, April 9) but now shows signs of realizing fulfillment. Analysts who had labeled the task of refilling storage as a “tall order” have now reversed their forecasts (see Daily GPI, May 25).

Driscoll’s estimate is on the low side. He predicts an injection of about 90 Bcf compared to 56 Bcf during the same week a year ago. “If our forecast is correct, working gas storage for the week ending May 25, 2001 will be 10 Bcf ahead of last year but still 124 Bcf below the five-year average.”

WEFA’s Denhardt mentioned competitive fuels still have not become a factor despite the fall in gas prices. “First, weather-adjusted working gas storage injections have remained extremely high despite gas prices becoming clearly competitive with distillate,” Denhardt said. “This winter there was a delay of several weeks in fuel switching from gas to distillate. Thus, it is possible that this delay is occurring in the opposite direction now. However, several of our clients have indicated that they have already switched from distillate to gas. If gas does not have much more market to regain from distillate then either prices must decline enough to regain market from residual fuel oil or warm weather must drive up gas generation to rebalance the market.”

Denhardt said regaining the residual fuel oil market will require Henry Hub prices of $3.80-to-$4.00/MMBtu for several weeks. The National Oceanic and Atmospheric Administration’s (NOAA) forecast for the week of June 5-11 is for large parts of the country to be much hotter than normal. “Until then, the only support we see for the market is the high speculative short position,” said Denhardt.

Lehman Brothers said storage injections since March 31 have been running 4.1 Bcf/d above seven-year averages. “If we continue to see ‘excess’ injections of 4.1 Bcf/d, Oct. 31 storage would be over 3,400 Bcf. End-October storage has averaged 2,900 Bcf and clearly storage will not get to the 3,400 level. Higher demand will be needed to fill the gap. We believe that natural gas needs to recapture demand that is currently being filled by lower-priced residual fuel oil for natural gas supply and demand to balance.”

Driscoll said he expected next week’s storage report to show an injection of 90 Bcf, compared to an injection of 78 Bcf a year ago. WEFA is expecting a similar refill next week.

AGA reported that last week was 25% colder than normal and 45.8% colder than last year. Gas-home weighted heating degree days (HDD) for last week were 35 (prior forecast was 45), compared to 24 last year and 28 normally. NOAA estimates that the current week’s weather with 30 HDD will average 50% colder than normal (20 HDD), and 57.9% colder than last year, which had 19 HDD.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.