US gas prices taking on a juggernaut look

The US natural gas market is starting to look less like a bull and more like a speeding train.

If forecasts of colder temperatures bear fruit this winter, that train may just become a runaway express.

Every week seems to bring a new record of next-month spot gas prices and gas futures prices on the New York Mercantile Exchange. NYMEX natural gas handily topped $5/MMbtu last week, and no sooner had that record sunk in than a new one easily bested that level this week. November NYMEX gas rocketed up 37

And that record promptly fell yesterday, as the NYMEX November contract shot up another $0.12 to close at $5.63. And there's nary a sub-freezing temperature throughout the US south of Alaska.

While much of the nation enjoys relatively pleasant weather this weekend, spot gas prices nevertheless are running more than double what they were a year ago at over $5/Mcf. Just think what will happen when, as weather services predict, temperatures are expected to return to below-normal levels by the middle of next week. Could $6/MMbtu gas futures be right around the corner, instead of well into the depths of the heating season in 2001?

It isn't just the current weather that is influencing natural gas prices. The 12-month NYMEX strip is trading at just a hair under $5/MMbtu.

What prompted the latest gas price rally was a report by the American Gas Association that only 62 bcf of natural gas was injected into storage for the week ended Oct. 6. That's down from 78 bcf in the prior week but higher than the comparable weeks in 1999 and 1998 at 49 and 41 bcf, respectively (although there were no concerns about heating season inventory levels at this time in those two preceding years.

The year-to-year gas storage deficit fell marginally with the latest week's injection rate, but that isn't likely to be repeated in the next AGA report, given the likelihood of a return to colder weather-especially in light of what injection rates historically have been at this time of year.

So, in order for natural gas stocks to reach even the minimal level of 2.7 tcf come the start of the heating season Nov. 1, PaineWebber estimates the storage level refill rate will have to reach 44 bcf/week each week until that date. Compare that with the weekly injection rate last year for the same period of only 17 bcf/week-amid a record warm winter-and a preceding 5-year average of 38 bcf/week.

Bear in mind also that the industry likes to enter the heating season with about 3 tcf for optimum storage operating performance to accommodate the occasional "arctic express" and still emerge at the end of the season with at least 1 tcf in storage to set the stage for the peak cooling load demand days of summer. Salomon Smith Barney reckons that starting the heating season with 2.6-2.7 tcf could easily mean ending the season with only 0.5 tcf in storage. Even another record-warm winter could leave storage at only 1 tcf-about where it was at the end of last March, which in turn set the stage for this year's price strength. With even the more modest demand outlook in mind, Salomon Smith Barney thinks that operators would still jave to "run hard, without any missteps, to refill storage by the start of next year's heating season."

Such a scenario spurred Salomon Smith Barney to jump its outlook for natural gas spot prices for 2001 to annual average of $4.25/Mcf, up from its previous forecast of $3.50/MMbtu.

Meanwhile, AGA is trying to put a happy face on the situation by contending that local distributions companies will be "well-prepared again this year to meet their customers needs," noting that the current storage level of about 2.48 tcf is already well above the amount of natural gas withdrawn from storage during each of the past five winters-with more than a month of "traditional" refill period remaining (making the point that, although the start of the heating season is Nov. 1, storage injections can and have continued into December).

That's all well and good, but what AGA doesn't point out is that the past five winters have been, for the most part, warmer than normal and that the storage crunch was not exacerbated as much by the surge in gas demand during the summer. And, yes, storage injections can continue well into December. But if really cold weather sets in and stays that way early in November, not a whole of gas is going to get injected into storage.

Will the frenzied pace of US natural gas drilling do much to alleviate the situation? The sharp spike in US gas drilling activity has propelled the Baker Hughes rig count past 1,000 for the first time in years, with the gas rig count itself hitting a recent record of more than 830. But Salomon Smith Barney notes that the US gas production rose only 1% in the third quarter from the level seen in the second quarter, and indications are that the fourth quarter will yield only a 0.6% further gain. And the rig count in Canada-a critical swing supply source for the US gas market-actually fell the week ended Oct. 10, largely because of the sloppy weather that always hinders rig movement in Alberta and Saskatchewan this time of year. This will mean the US will be pulling more spot LNG cargoes this year and next than ever before, and the country's LNG terminal operators will have to place an urgent priority on capacity expansions.

The way things are shaping up, don't be surprised to see brief spikes of double-digit natural gas spot prices during an "arctic express" event across the northern and eastern US this winter. And forget about $2/Mcf gas for at least another year, maybe longer.