Natural gas headed for crisis, analyst says

Spot natural gas prices remain above $4/MMbtu. Future contracts through March of 2001 for natural gas are also well above $4/MMBtu. And the 12-month strip is currently trading at $4.22 or $1.36 higher than last year at this time.

Natural gas prices will continue to remain high driven by increased demand for storage, need for summer cooling, fears of supply interruptions during the hurricane season, and the recent explosion on a pipeline owned by El Paso Natural Gas Co., a unit of El Paso Energy Corp., analysts say.

“It is clear to us that the US is headed for a natural gas crisis this winter,” says Marshall Adkins, analyst with Raymond James & Associates, Houston. “The winter is setting up for a more dramatic shortage scenario with severe upward price spikes.”

Even though the American Gas Association reported 55 bcf were injected into storage injection for the week ended Aug. 18, slightly above the comparable week in 1999, analysts were disappointed with the numbers.

Most experts expected a higher number to be reported, according to a report issued by SalomonSmithBarney. But injections over the last 16 weeks have averaged about 1% lower than in 1999. Experts note the lower injection figures have come in spite of cooler temperatures in most of the country, except the Southwest, and a greater availability of nuclear generation. Under the circumstances, experts says, more gas should be going into storage.

Storage levels to date are roughly 15% below last year and will require injections of about 90 bcf/ week for the next 10 weeks to get to the same level as last year at the end of the summer cooling season, according to SalomonSmithBarney.

PaineWebber analysts have similar estimates.

“For the industry to reach the 3,000 bcf targeted storage level by Nov. 1, 2000, the weekly injection level would have to about 86 bcf. This compares with last year’s refill rate of 51 bcf/week and the prior 5-year average of 59 bcf,” states a Paine Webber report issued Thursday.

Such projections combined with the frantic pace at which natural gas must now be injected into storage for winter to have on hand during cold snaps is pressuring the price upwards.

The 5-year average for storage on Nov. 1 is about 2,911 bcf. The current storage figures are shaping up considerably below that.

The hurricane season remains in full swing through November. One forecast calls for 11 tropical storms and three major hurricanes in the Atlantic. There is a 34% probability that some of these hurricanes will enter the Gulf of Mexico and disrupt supply, according to SalomonSmithBarney.

Last weekend’s natural gas pipeline rupture in New Mexico took gas out of the system and has only added to the pressure on prices.

Adkins suggests that if the winter begins with only 2,650 bcf in storage, then it is highly likely supply dislocations could occur in some regions of the country. Moreover, at the end of a normal winter, gas inventories in storage will be so low that prices are likely to explode and marginal gas consumers will be shut down, he says.

Analysts worry that it will take the gas exploration and production industry some time to correct this tight supply situation. A record number of rigs drilling for gas notwithstanding, SalomonSmithBarney analysts say production will be up only about .2 bcf/day for the rest of the refill season.