US gas supply, demand numbers in flux

Nov. 3, 2003
With the onset of the winter heating season, there is flux in the numbers for US natural gas supply and demand.

With the onset of the winter heating season, there is flux in the numbers for US natural gas supply and demand. In the former instance, a clearer picture may emerge; in the latter, the view remains cloudy.

In other words: Things are not always what they seem to be when it comes to the outlook for natural gas prices.

Storage data

The US Energy Information Administration has instituted a change in natural gas storage data methodology that was to take effect Oct. 30. When the new approach kicks in, EIA will give storage estimates for the week ended Oct. 24 and release revised storage numbers for July 4-Oct 17.

The change entails an increase in the number of storage companies surveyed, to 55 from the original 44. What this is does, in effect, is boost the storage volume indicated by the agency's weekly survey and by so doing provide a stronger correlation between EIA's weekly and storage figures.

But the change also produces a sizeable jump in what has been widely perceived as the "magic" number for gas storage entering the heating season. The 3 tcf usually cited as the comfort threshold for gas storage as of Nov. 1 now must give way to volumes that would reflect an additional 11 storage facilities.

Ohio energy economist James L. Williams, president of WTRG Economics Inc., for some weeks has been warning that EIA was underestimating storage volumes. He reckons that the upward revision in the storage survey of about 40 bcf, together with a projected 80 bcf in storage injection, would bring storage up to about 3.15 tcf in the last week ahead of the onset of the heating season.

While Williams predicted a volatile week for gas prices for the week ended Oct. 31—owing to the futures contract expiration and EIA revision—it seems likely that the change will produce less volatility in prices in the long run. There might also be a slight depressant effect on prices, just on the strength of a higher psychological hurdle for the market to get bullish about.

Industrial demand question

A more fundamental concern for the gas price outlook is whether or not estimates of lost industrial gas demand have been overstated.

Joseph Allman, analyst with RBC Dain Rauscher Inc. in Houston, says he believes that is the case, claiming that some analysts and investors are overestimating the volume of industrial gas demand lost due to high gas prices. Allman puts his estimate of "actual" lost industrial demand at only 1.5-2 bcfd vs. a "street" consensus of 4-5 bcfd.

The culprit, he contends, is a faulty weather comparison that some were using to draw conclusions about demand levels that resulted in surplus injections. The presumption on the part of many was that temperatures were close to normal during most of the summer. Market-watchers who based their projections on a comparison of this past summer's temperatures with a 30-year average and thus found them above normal inferred that another factor, probably collapsed industrial demand, was the cause of high storage injection rates.

No so, says Allman, who pointed out that temperatures this past summer were actually 16% below average compared with the average for 1998-2002 and 20% lower than summer 2002.

In fact, Allman contends that some of the industrial demand has returned—perhaps as much as 1 bcfd—with the falloff of gas prices from $6/MMbtu territory and continued strength in oil prices.

Another culprit in the storage surge was an increase of about 1 bcfd in US LNG imports in the first half.

The loss of industrial demand, weather unfavorable for demand, and stepped-up gas imports all helped to moderate gas prices. Expected reversals in those circumstances (or flatness, in the case of LNG imports), coupled with a continued decline in US wellhead gas production, are likely to be supportive of higher gas prices.

The difference: Allman's projection of an average gas price of $4.75/MMbtu in 2004 vs. the street consensus of $4/MMbtu or less.

And don't forget the last heating season, which started off with a solid comfort level in storage at the outset but still saw gas prices reach double digits in December as one arctic express followed another.

What feels comfortable Nov. 1 may just inspire Mother Nature to do her worst.

(Online Oct. 27; author's e-mail: [email protected])