Even though working gas-in-storage is very low, there’s not much financial incentive to inject. Following last month’s 61 billion cubic feet (Bcf) injection, U.S. working gas-in-storage storage of 684 Bcf is now about 6 percent below the previous all-time low for this time of the year. However, because of a relatively modest “contango” in the futures market (about $0.25 per thousand cubic feet nine months out), the financial incentive to inject gas into storage is not compelling, in our opinion. In other words, the cost of storing gas over this period is higher than the arbitrage between the current spot price and the nine-month futures price. The primary incentive to inject, in our opinion, is the urgent need among regulated gas utilities to begin preparing for the next winter demand cycle, especially given the 8 percent to 9 percent decline in U.S. natural gas deliverability over the past two years.
There are three factors we believe will contribute to tight U.S. natural gas markets in 2003. First, following a period of unseasonably cool weather, prognosticators are forecasting a return to normal to slightly above-normal temperatures this summer, which should help drive cooling demand in the residential and commercial sectors. Second, we continue to believe Canadian natural gas exports to the U.S. in 2003 will be flat for the second consecutive year, even though the Canadian rig count is up 17 percent from last year. And third, expected low levels of hydroelectric power generation in the northwestern U.S. should be a positive for natural gas demand in the West, as moisture run-off levels are 20 percent to 25 percent below normal. Accordingly, we do not anticipate hydroelectric plants will have excess power to compete with natural gas this summer in the Northwest.
It is unlikely 2003 will be a replay of 2001, when natural gas prices dropped below $3. Following a dramatic price spike in the winter of 2000-2001, natural gas prices pulled back to between $2 and $3 per million British thermal units (MMBtu) in the second half of 2001 and the first quarter of 2002. In our opinion, such a decline is unlikely to recur in 2003 for the following reasons:
“- We estimate U.S. dry gas production in the second quarter of 2003 approximated 49 Bcf per day, or 8 percent below second quarter 2001 production of 53 Bcf per day.
“- Total U.S. natural gas demand in 2003 is projected to exceed total 2001 de-mand by 1.5 Bcf per day, or about 3 percent, mainly due to our normal weather assumption for the winter of 2003-2004; this is in contrast to one of the warmest winters on record in 2001-2002.
“- As stated above, Canadian natural gas imports, which increased 6 percent in 2001, are projected to remain relatively flat in 2003 for the second consecutive year.
“- The average U.S. gas rig count in 2003 is projected to come in about 12 percent less than 2001, even though we expect it to break through the 900 level by the fourth quarter.
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Our forecast assumes net injections from May 1 to November 1 will be 0.7 percent above the five-year average of 65 Bcf per week. On the heels of an estimated 3 Bcf to 4 Bcf per day supply shortfall during the winter months, our U.S. natural gas supply/demand model in the figure also incorporates 2 Bcf to 3 Bcf per day of price-induced demand destruction in the industrial sector during the second and third quarters of 2003, mainly due to recent announcements by major chemical manufacturers that they are reducing natural gas consumption in response to high natural gas prices. Also, we are estimating a 0.8 Bcf per day (50 percent) year-over year increase in LNG (liquefied natural gas) imports for 2003, to 1.6 Bcf per day, mainly due to increased imports from Trinidad and Nigeria and a capacity increase at the Cove Point, Md. import facility beginning in the second quarter. Even though we fully expect gas storage injections to be relatively high this spring (perhaps in the 100 Bcf per week area in late April and in May), mainly due to expected strength in regulated and nonregulated electric utility demand, we do not believe high injections will be sustainable this summer, primarily due to normal cooling demand and the above-mentioned supply shortfall.
For a more recent natural gas outlook from A.G. Edwards, visit EL&P’s online extras section.