US natural gas storage levels pressuring gas prices

Natural gas prices have dropped from $3.95/MMbtu in mid-May to $2.78/MMbtu currently, based on the New York Mercantile Exchange futures contract for August delivery.

July 17, 2002

2 min read

By OGJ editors

HOUSTON, July 17 -- Natural gas prices have dropped from $3.95/MMbtu in mid-May to $2.78/MMbtu currently, based on the New York Mercantile Exchange futures contract for August delivery. Storage injection rates remain at unsustainable levels, and as long as the year-to-year storage overhang persists, gas prices will need to fall more to encourage demand.

So said Thomas R. Driscoll, an analyst with Lehman Bros. Inc. in New York, in a research note Tuesday. He contends that natural gas prices will need to weaken further—maybe to $2-2.25/MMbtu before gas storage levels will decline.

"Although natural gas prices have been below those (equivalent for) residual fuel oil in recent weeks, we need to see further price decreases to encourage demand," Driscoll said, adding that current injection rates imply the injection season could end with 3.5 tcf of gas in storage.

"We speculate that weakening natural gas prices will begin to lead to a recovery in natural gas demand. It is not clear to us how much weakness in natural gas prices was/is required to reach a balanced market—but we believe that demand needs to rise by an average 2.5 bcfd over the remainder of the refill season to prevent storage from exceeding our estimated end-of-season storage level of 3.2 tcf," Driscoll said.

Production
He expects that second quarter US natural gas production will be largely in line with first quarter production and 5% below second quarter 2001 levels.

"For full year 2002, we estimate that Lower 48 production will be 4.5-5.25% below 2001 levels. We estimate that first quarter production dropped 3% sequentially and 4.8% year-over-year," Driscoll said.