Even a summer heat wave hasn't buoyed near-term US natural gas prospects much.
The week ended July 27 marked the fifth consecutive week of above-normal temperatures in the US-and, briefly, some startling cash bids for spot gas in the New York City area. For the cooling season thus far, the number of cooling degree-days has been averaging 10% greater than normal and 3% greater than last year. And the National Weather Service outlook calls for more of the same for most of the country through mid-August.
But cooling demand strength isn't coming to the gas market's rescue. A dawdling economy, robust hydropower conditions in the US West, and the resilience of nuclear power plants are conspiring to sustain a depressingly consistent injection rate into already glutted storage. For the week ended July 26, according to the Energy Information Administration, 60 bcf of gas was injected into storage. That put the year-over-year storage surplus at 326 bcf, estimated UBS Warburg LLC's Ron Barone, vs. 334 bcf the week before and 347 bcf the week prior to that. Even as the hot weather continues to chip away at the YOY storage surplus, Barone nevertheless projects that surplus holding at 275-300 bcf through August.
It thus takes a ridiculously modest storage injection pace to reach the optimum neighborhood of 3 tcf to start the heating season. Accordingly, Barone and other analysts see storage reaching capacity well ahead of the heating season's start, which could put strong short-term pressure on gas prices prior to the onset of the season.
Perceptions vs. prospects
Sometimes it seems, to hear some analysts tell it, that there is nothing wrong with the gas market that a good dose of Ritalin administered to traders wouldn't fix.
An apparently attention-deficit market cannot seem to focus on gas markets more than a couple of months hence and thus cannot see the looming deliverability-crunch "forest" for the immediate storage-glut "trees."
Merrill Lynch Global Securities Research & Economics Group's John P. Herrlin Jr. takes note of the continuing slide in US wellhead deliverability in looking at a market with its signals apparently crossed. Tracking a universe of 10 integrated and 16 US independent firms, he estimated US second quarter gas production fell 0.7% sequentially (from the first to the second quarter) and 6.2% from a year ago. The companies tracked represent 42% of US gas productive capacity.
Overall, predicts Herrlin, US gas production is likely to drop 3-5% this year from last year, which should put the storage situation in a better perspective.
"The bottom line for natural gas is perception," he said in a recent research note. "Is having an extra 300-400 bcf in storage (820 MMcfd-1 bcfd) of excess withdrawal capacity that much of a negative, all things considered? Will excess gas in storage cause greater system deliverability or gas-on-gas competition? We don't think so."
More volatility
The upshot of all this is that traders ought to recognize that the US gas market is in another period of transition, driven in large part by the current economic downturn as well as by market fundamentals.
The thing to remember is that, even given the current state of prices-actually still pretty high by historic norms-the US is not adding productive capacity at a rate like that seen in the past decade. And that means a price spike is still coming, even if a price collapse precedes it in the coming months. In fact, the price collapse may even hasten that spike as it squeezes deliverability even further.
"The bad news for energy companies is that, unless some abnormally warm weather or a hurricane shows up, gas prices could easily tank into the $2(/MMbtu) range this fall," said Marshall Adkins, Raymond James & Associates. "The good news is that lower gas prices today mean even higher gas prices in 2003," which RJA pegs at an average $4/MMbtu.
Adkins contends that current anemic drilling activity and near-term weather outlooks are driving US gas markets toward a gas supply shortfall in the winter. What's more important, he adds, is that this shortage is likely to occur regardless of how the broader economy is performing.
So maybe the prescription shouldn't be Ritalin, but just patience.
(Online Aug. 2, 2002; author's e-mail: [email protected])
