Natural gas storage levels likely to stay above 5-year average

By OGJ editors

HOUSTON, July 16 -- US natural gas storage levels through most of July will stay well ahead of the 5-year average, according to a study of natural gas injection and withdrawals conducted by economists with the consulting firm C.H. Guernsey & Co., Oklahoma City.

The study shows the net injection rate has kept pace with the historical average since early April and should continue through July.

The study, based on a Guernsey model, predicts stored gas will reach 2.54 tcf through the week ending July 26. This maintains the gas-in-storage level at 16% above the 5-year average of 2.17 tcf. Many analysts set 3 tcf as a target for gas storage levels at Nov. 1, before the winter heating season.

Weather plays a role
"Although there has been a decline in production during the injection season because of lower prices this year, the decline has been effectively offset by demand-side factors, such as the weather and economic activity," said Donald Murry, a Guernsey economist.

As part of the study, Guernsey economists analyzed weather predictions through much of July for key summer gas-consuming regions. They found that the expectation of increased gas consumption from warmer-than-normal weather predictions in key areas such as Chicago and Atlanta should be offset by lower-than-normal consumption in key areas such as Philadelphia and Houston.

An analyst agrees
Banc of America Securities analyst James Wicklund agreed with the Guernsey report. "Even though the surplus has narrowed, we are above the 5-year average. Full is considered anywhere (at) 3-3.2 tcf. Near-term, it is a demand issue, although as the economy recovers and the weather normalizes, the critical point should shift to supply," he said.

Wicklund expects domestic gas production will continue to decline because current prices are not high enough to generate a sharp rise in drilling activity. "This should potentially lead to a very tight market next year as demand stabilizes and starts to increase," he said.

The working storage level for the week ended July 5 was 2.35 tcf. The net gas storage injection for that week was 67 bcf, which was below the 5-year average of 85 bcf.

In a research note dated July 11, Wicklund said, "The weather during the week was 24% warmer than normal. The injection was 7 bcf below the consensus estimate. The storage surplus (vs. normal levels) now stands at 376 bcf, down from a high of 690 at the beginning of February. "However, once again, the DOE revised its historical data, resulting in a 26 bcf cumulative increase to storage. As a result, this week's reported storage surplus is actually 8 bcf larger than last week."