Knoxville, Tennessee (Platts)--8Sep2009/533 pm EDT/2133 GMT

With more and more pipelines issuing imbalance orders, the natural gas market is seeing clear evidence that US storage caverns are nearly full and the result will be increased shut-ins and prices possibly falling below the $2/Mcf level in some areas, Raymond James analysts warned Tuesday.

"Over the past two weeks, the impending gas price debacle has finally become clear to the market as several major pipelines carrying natural gas from producing regions to the Northeast have issued imbalance warnings," the analysts said in a research note. "These warnings are a clear indication that the US is running out of gas storage capacity."

The operational flow orders "are a very bad sign for natural gas prices, given that we have an incredible eight to 10 weeks left in the injection season," Raymond James added. "To put it bluntly, we're filling storage too fast and gas producers will be forced to shut in via lower (sub-$2/Mcf) gas pricing over the next couple of months."

The analysts noted that storage is already at an all-time high of 1.079 Tcf in the producing region, whereas stocks in the region were only at 773 Bcf this time last year.

In the East, ratchet clauses prevent storage from being filled more than 80% on September 1, the analysts noted. "Clearly the slew of imbalance orders and critical alerts issued last week by these Northeast-bound interstate pipelines was a means to stay under this 80% threshold." Eastern inventories are at 1.724 Tcf, while last year stocks were at 1.599 Tcf.

The market has only seen the beginning of such imbalance warnings, the analysts said. As it heads into the tail end of the injection season, "we believe that the gas-on-gas competition amongst shippers will intensify, thereby creating more imbalances in the system. If storage in the East comes even remotely close to full capacity [estimated at 2.178 Tcf], don't be surprised to see the gas being pushed back toward the South, creating a backup and price blowout at the main natural gas price point, Henry Hub."

The cash market at the Henry Hub was trading at $2.86/Mcf late in August, the analysts said, and has been falling by the day recently to below $2/Mcf. "Keep in mind that at the end of each month, cash prices and futures prices converge," the analysts said. Firm shippers would benefit the most from wide-scale imbalances and a backup at Henry Hub, as they have the ability and incentive to drive spot prices lower, Raymond James noted. "These is little room for LDCs to 'arb the market' with their capacity" since most are regulated or governed by prudency schedules.

"In other words, natural gas falls victim to marketers, who must find a fair value for the gas in an extremely oversupplied market," the analysts said.

"And with nearly 50% of the capacity in the producing region owned by marketers, this could magnify the problem, leaving cash prices at the Hub looking not so pretty."

That backup in gas to the South/Gulf region could have a dramatic impact on prices in regions farther west as well, the analysts said.

With increased takeaway capacity from the Midcontinent and Rockies, bottlenecks have shifted eastward, displacing Southeast/Gulf gas, the analysts said. Those regional prices are thus likely to follow Henry Hub downward as caverns in the East fill. Since there will be very little incremental demand, "we expect regional prices will fall lockstep, with basis differentials (on a percentage basis) at major hubs and transfer points to remain narrow and similar to current levels," they said.

"Only until we head into withdrawal season will we begin to see demand pick back up, and consequently, basis widen back up. Even then, the differentials may not widen as much as they have historically since drilling activity has fallen more in the areas that had the highest differentials last year," the analysts said. --Stephanie Seay, stephanie_seay@platts.com