It's entirely appropriate, one supposes, that the US government launches a summit to address a commodity crisis just as the first signs appear that the crisis is resolving itself.
Consider the alternative: a possible government fix that could entail rationing and price controls.
Yes, that sound you hear is a giant collective sigh of relief. But not just from the sight of easing gas prices. Government "cures" for market "illnesses" bring to mind the 18th century medical practice, often fatal, of bloodletting to cure yellow fever victims. Sometimes the cure is indeed worse than the disease.
In any event, recent massive injections of natural gas into storage have cooled off overheated gas prices.
For the second time in a month, the US Energy Information Administration reported a record high volume of gas injected into storage during the week ended June 20. That injection, of 127 bcf, bested the previous record, 125 bcf, set the week ended June 6.
The surprising numbers left some market observers thinking that horrific price spikes warned of for this winter may be avoided after all. Indeed, the current year-to-year storage deficit at last report had shrunk by 65 bcf in June to 653 bcf. Some are already predicting gas prices will pierce the ostensible current floor of $5/Mcf in July.
2001 redux?
Some analysts sees the potential for a repeat of the confounding disaster that was the gas market of 2001.
Analysts with Morgan & Keegan & Co.'s Houston office recalled the market gyrations of 2001, when early expectations were for tight supplies throughout the year. Those hopes were dashed following a series of 90+ bcf injections, whose persistence gradually erased the year-to-year deficit. The cooling season ended that year with a record 3.24 tcf in storage, "an event considered almost impossible by market players earlier in the period," M&K analysts said.
"Consensus range for storage this year is still 2.7 tcf, and this serves as a prop for $6/Mcf gas prices," the analysts said. "We believe 3 tcf is quite possible and would not write off anything as impossible, given the 2001 experience."
M&K cites several 2001 vs. 2003 parallels: Gas peaking at over $10/Mcf in the preceding winter, inventories remaining in deficit vs. the historical average, crude prices persisting near $30/bbl, and weather patterns behaving similarly.
The analysts also note the differences between the 2 years: gas prices at $2-4/Mcf vs. $6/Mcf today, a storage deficit about a third greater today than in 2001, and a feebly improving economy today vs. a rapidly sliding economy just prior to Sept. 11, 2001.
"A decline towards $4/Mcf if we near 3.0 tcf is not inconceivable, assuming oil holds above $28/bbl," M&K said.
Supply-demand factors
The keys to gauging the direction of the gas market the rest of this year could rest in more conventional areas of supply and demand.
Fuel-switching is not a likely factor at this point, notes energy economist James L. Williams, citing sharp gains in distillate and resid consumption this year vs. last: "This indicates that much of the fuel-switching has been done already."
So that leaves little doubt that much of the gas supply available for injection stems from relentless demand destruction owing to high prices.
As to supply? The Baker Hughes count of US active rigs continues to hold above 1,000, with much of the recent gains attributable to land rigs drilling for gas. That's another example of 2001 déjà vu: price-driven opportunistic drilling.
But, as regular readers of this space also will recall, the continuing deliverability problems of US gas wells offsets rig count surges more and more each year. That is why, even with the 200+ gain in the rig count this year vs. last year, M&K estimates US wellhead supply this summer will be 4 bcfd below last summer. Canadian production has shown slippage of late as well.
Meanwhile, forecasters call for a heavy hurricane season in the Gulf of Mexico. And the really hot part of summer is still around the corner.
Still, would you trade $10-20/Mcf in the winter, and with it possibly permanent price and allocation controls, for $4-5/Mcf all year and no dunderheaded congressional investigations into price-gouging?
Thought so.
(Online June 27, 2003; author's e-mail: [email protected])
