Low storage levels underpin bullish gas outlook

March 28, 2003
If many analysts' expectations are fulfilled, the next heating season may begin with storage near record-low levels. Accordingly, the recent retrenchment of gas prices from their dizzying heights of some weeks ago may have already found a floor near $5/Mcf.

Natural gas storage levels in the US lately have ridden the wildest rollercoaster in some years.

US gas storage entered the heating season at unusually high levels and is exiting the season at unusually low levels. If many analysts' expectations are fulfilled, the next heating season may begin with storage near record-low levels. Accordingly, the recent retrenchment of gas prices from their dizzying heights of some weeks ago may have already found a floor near $5/Mcf.

Energy Security Analysis Inc. notes that storage capacity is near a historically low level of 15% just ahead of the traditional refill season. It remains to be seen, says the Boston energy analyst group, whether the pace of injection will match that of 2001. It also is up to question whether a rising active drilling rig count will deliver the production gains needed to bolster supply enough to meet what's expected to be fairly robust gas demand this year.

Storage concerns

Due to bullish summer demand projections—driven in part by forecasts of a hot summer and by a weak showing by US nuclear and hydro power—and a limited production response, ESAI forecasts that storage capacity will reach only 63% by the end of September. That would prove to be the most bullish supply levels in 10 years, the analyst says.

However, one sign that storage operators are keen to begin refilling was the storage report from the US Energy Information Administration for the week ended Mar. 21. EIA estimated US gas storage operators injected a net 7 bcf into storage for the week. This compares with storage withdrawals of 85 bcf for the week prior, 75 bcf for the same week last year, and 58 bcf for the 5-year average for the period. The injection also confounded the expectations of some storage watchers, as it represented the first time an injection had been seen for that week. UBS Warburg LLC analyst Ron Barone reckoned "the Street" had been estimating anything from a 15 bcf withdrawal to a 10 bcf injection.

Don't count on the weather helping to sustain that injection pace. While temperatures eased during the week of the storage injection report, the forecast for early to mid-April calls for below-normal temperatures across the North and normal temperatures across most of the rest of the US.

Whether regarding storage data from the American Gas Association (which is no longer in that game) or the EIA, the refill season is expected to start at near-record lows.

"The low storage balance will require a significant injection pace of 11 bcfd to get supplies to the 3,000 bcf comfort level by Nov. 1, 2003, vs. the prior 9 year average (when deliverability was higher and underlying demand was lower) of 9 bcfd," Barone said in a Mar. 27 research note. "Moreover, assuming normal weather, we believe the goal of reaching 3,000 bcf by Nov. 1, 2003, seems highly unlikely, given a heightened level of nuclear maintenance activity this spring and comparably weak Pacific Northwest hydro conditions."

Supply concerns

The US active rig count is indeed showing signs of revival, reaching a level the week ended Mar. 21 that was about 200 units higher than the same time a year ago. Most of that increase came in natural gas-directed rigs, but the percentage increase in gas rigs year-to-year did not match that of the overall rig count rise. That indicates that oil-directed rigs are garnering a bigger portion of the rig count than they did a year ago.

At the same time, OGJ's capital spending survey, featured in this issue, shows that US upstream spending is likely to be flat across the board. With oil rigs sucking up more of an already limited capital pool, that suggests the gas-driven portion of the rig count will not pace the kind of surge seen 2 years ago, when a wave of price-spawned opportunistic drilling created a huge year-on-year gas inventory surplus. At least one sign of that is already evident in the fact that while the gas rig count is up by a little less than 200 units on the year, it's still down more than 200 units vs. 2 years ago.

That does not bode well for US efforts to reverse the continuing decline in gas production.

Not even at $5/Mcf.

(Author's e-mail: [email protected])

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