Remember The Case of the Missing Barrels? That was a controversy of a few years back when critics blamed an apparent gap in the International Energy Agency's supply data as a contributor to soft oil prices.
Now we seem to have The Case of the Phantom Surplus. As natural gas markets have softened in recent weeks, a major contributor to the slackening market has been a lingering year-on-year gas storage surplus.
This overhang dates back to last year. It stems from a big ramp-up in gas supplies, owing to high-price-induced opportunistic drilling in 2001, and from flabby demand, owing to a warm stretch late last winter.
But a major contributor to natural gas price uncertainty this spring has been the switchover of weekly gas storage data from the American Gas Association to the US Department of Energy's Energy Information Administration (see Market Hotline, OGJ Online, May 13, 2002).
The handoff occurred May 9, and there was no lapse in reporting data. What came into question-interestingly, by Simmons & Co. International, a major proponent of the Missing Barrels theory, as well as other critics-is the change in methodology and sampling of companies surveyed in calculating the storage data. The concern has been that these changes could create potentially false indicators of the relative health of the US gas market.
Fiddling with numbers
EIA in fact fiddled with its own storage numbers when it released its storage report for the week ended June 14. The agency made multiple revisions throughout its data series each week going back to Nov. 2, 2001 (the start of the last heating season). This resulted in a cumulative increase of 41 bcf in the prior week's supply number.
As far as critics of the DOE storage data reporting were concerned, that was like waving a red flag in front of a bull.
"Now that the DOE is tracking the weekly storage data, we must call into question both the accuracy of the newly reported weekly data and also the usefulness of the longer-term historical baselines provided by the DOE," said Marshall Adkins, analyst with Raymond James & Associates Inc., St. Petersburg, Fla. "We believe the net impact of this poor data quality has created the impression of a looser, or more oversupplied, gas market than actually exists."
Noting that the DOE data did not match the historical weekly AGA numbers, Adkins said that DOE fabricated a new set of historical weekly injection data in a bid to have its monthly data dovetail with weekly data similar to AGA's. But Adkins claims that DOE botched the job. He contends that, while the AGA data were flawed, at least they were actual weekly numbers, not a derived formula; and that there are clear examples where the DOE restatement methodology is flawed. Adkins cited several examples of historic, holiday-related major spikes in natural gas injections that were not accounted for by DOE's formula.
All of this gives the impression, critics claim, that there is more gas available for markets than actually exists. Adkins estimates that "phantom surplus" at 1 bcfd. And he expects more revisions in the future.
The solution is to not place too much stock in any given weekly gas storage report, says Adkins, who sees more value in a 4-week moving average.
Other fundamentals
What about other market fundamentals for natural gas this summer? The stage is being set for a tighter market.
The near-term outlook for oil prices seems mixed at best, with the perpetual Middle East hostilities creating a "panic premium" to offset a nascent production war possibly brewing between the Organization of Petroleum Exporting Countries and non-OPEC exporters abandoning their restraint this summer. But the fall definitely looks to be tighter for oil supply-demand, just as refiners start trying to make more fuel oil that would compete with gas in the winter.
The National Weather Service is calling for above-normal temperatures across the southern US-where gas-fired cooling load is prominent-during July, following a similar trend in late June in the northern and West Coast states.
And preliminary EIA data show US dry gas production down 5% in the first 4 months of 2002 vs. a year ago. Boston-based Energy Security Analysis Inc. pegs that decline at 4% for the full year. Maybe the market will need that phantom surplus just to keep a lid on prices late in the year.
(Online June 21; author's e-mail: [email protected].)
