US gas storage levels could lead to 'abrupt' price drop: CERA

Washington (Platts)--6Jun2006

US natural gas prices could decline "abruptly" this fall if portions of
the North American gas storage system reach their operational limits,
Cambridge Energy Research Associates said Monday.

Absent a warmer-than-normal summer or significant gas supply disruptions
by hurricanes, CERA said it expects the October 31 North American gas storage
inventory level to reach 4.2 Tcf, a more than 95% fill of expected working gas
storage capacity. Given end-of-cycle physical limitations on injections, and
expected average September and October storage injections about equaling
injection capability, CERA added that it expects some storage fields,
especially in the eastern US, will not be able to accommodate additional
injections.

"In today's North American gas market, where prices are market
responsive, insufficient storage working capacity to accommodate all gas
available for injection is likely to lead to a sharp and swift drop in spot
gas prices," said CERA Director Ken Yeasting. "As gas prices fall toward
$5/MMBtu, displacement of coal-fired generation by gas-fired generation will
provide additional demand and thus support gas prices and rebalance the
market."

The coal-fired units most likely to be displaced would be older,
inefficient eastern coal plants burning high-cost Appalachia coal without
emission control equipment, in markets where prices for sulfur dioxide
emissions allowances are relatively high, Yeasting added.

CERA calculated that North American withdrawal capacity ranges from 48
Bcf/d when inventory is at or above 60% of working capacity, down to 37 Bcf/d
or less when inventory is below 20%. North American injection capability, the
consultant added, ranges from 33 Bcf/d when inventory is below 50% of working
capacity, down to 15 Bcf/d or less when inventory is above 90% of working
capacity.

Consequently, when gas storage inventories are high in the summer, the
gas market has less flexibility to respond to daily or balance-of-season
decreases in demand or increases in supply; and it will take a greater
decrease in gas prices to balance the gas market when inventories are high and
injection capabilities are low, the consulting firm said.

With US lower 48 gas storage inventories expected to be at a record level
of 3.643 Tcf by the end of October, compared with a working storage capacity
of 3.76 Tcf, there will be little spare working storage capacity to
accommodate additional gas supply, CERA said, adding that at these levels it
estimates daily storage injection capability of the US Lower 48 will fall to
10.7 Bcf/d or less at the end of the injection season.

With September and October storage injections expected to average 11 and
10.2 Bcf/d, respectively, it is likely that some storage fields, especially in
the East, will not be able to accommodate additional injections, CERA
concluded.

CERA's report follows similar findings last week by consulting firm
Bentek Energy, which predicted that some major US natural gas storage
facilities will be full as early as July. Bentek said that without hurricane
disruptions and hotter-than-normal weather, many facilities will be turning
away gas before the heating season begins.

In addition, Bentek said that because high gas prices have destroyed
demand permanently in the industrial sector and most fuel switching has
already occurred, filling storage to its maximum level has the potential to
send gas prices plunging this fall.

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