Study: US government could limit industrial gas use

Natural gas storage injections and storage levels in the US are both down from peak injection season 1 year ago, according to the American Gas Association. As a result, natural gas prices will possibly push higher this year, raising the fear the US government could limit industrial gas use this winter, says Salomon Smith Barney.

Jun 1st, 2000

Natural gas storage injections and storage levels in the US are both down from peak injection season 1 year ago, according to the American Gas Association. As a result, Salomon Smith Barney projects natural gas prices will remain strong, and possibly push higher, throughout 2000.

"We...now believe that our $3.25/MMbtu composite spot forecast for 2000 and 2001 could prove conservative. Our biggest fear for the US economy is that events transpire such that supplies are so constrained this winter that the government steps in to limit industrial consumption in order to have adequate supplies for residential consumers for home heating purposes," the firm said.

For the week ending May 26, injections were 56 bcf, compared with 71 bcf in the same period in 1999 and 106 bcf in the comparable 1998 period. Storage levels are nearly 25% lower than last year and are expected to be below 2,500 bcf by November 2000, compared with nearly 3,000 bcf in November 1999.

Growing demand for power and increasingly tight supplies are causing the decline in gas stock levels. As a result, gas futures are trading above $4/MMbtu.

"We do not see anything on the horizon that would induce a sharp retreat in natural gas prices, which are roughly $1.77/MMbtu above 1 year ago," said Salomon Smith Barney. "In fact, factors could emerge to push natural gas prices even higher in 2000."

The US natural gas rig count reached 662 last week, up from late 1997's peak of 650. "However," said the analyst, "our analysis continues to indicate that the domestic gas rig count must exceed 800 just to return deliverability to where it stood at the beginning of last year. In the meantime, we expect [gas] demand to increase due to continued economic expansion and the addition of new, predominantly gas-fired electric generating capacity."

Storage levels
Storage injections in May 2000 averaged nearly 3 bcf/day lower than May 1999. "Thus...the market has become increasingly aware of the fact that storage levels are likely to enter next winter below 2,500 bcf, compared with nearly 3,000 bcf...last year," said Salomon Smith Barney.

"Consequently, the heat has been turned up to the boiling point on natural gas prices, which are now 85% higher than 1 year ago. In addition the months of May and June are typically the peak injection months before the onset of the heavy summer cooling demand period.

"Our deliverability model�incorporating production decline rates and expected production additions from drilling activity�indicates that deliverability during...May should have been down roughly 1.8 bcfd year-over-year."

Demand increases are harder to gauge, says the firm. A rough estimate, however, indicates demand could be up 2.7% vs. over last May.

"This is in line with most industry expectations," said the analyst.

Salomon's analysis concludes that gas prices will remain "quite strong," as have many similar studies recently.

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