Knoxville, Tennessee (Platts)--1Aug2013/404 pm EDT/2004 GMT

With US natural gas storage inventories already at 2.845 Tcf with three months left in the refill season, estimates for season-ending levels may need to be revised upward if forecasts for milder weather come to pass, analysts said this week.

Summer came in like a lamb and may exit the same, but overall the weather has "just not been as hot as last year," noted analyst Martin King at FirstEnergy Capital.

As a result, gas storage injections have trended above the five-year norm except for a few weeks of anemic builds in July when a heat wave blanketed key consuming regions.

Many analysts have already raised their forecasts of how much gas will be in storage at the end of October, with most now expecting between 3.7 and 3.9 Tcf. And more upward revisions are likely.

Such estimates "exceed the five-year average and rival the sort of excess inventory levels maintained since the multi-year surplus began in 2009," said analyst Teri Viswanath at BNP Paribas.

The US Energy Information Administration on Thursday reported a build of 59 Bcf, above both the year-ago 28-Bcf build and the five-year average of 47 Bcf. The total deficit to the five-year average, which had approached 500 Bcf, now stands at just 34 Bcf.

And above-average builds will likely continue as the National Weather Service calls for below-normal temperatures for the bulk of the country in its latest eight- to 14-day forecast, which should dampen cooling demand.

"We have moved past the climatological peak of summer, and the 14-day forecast does not indicate any significant heat for the US through the first half of August," said Logan Reese, analyst at Platts unit Bentek Energy. "We may still see a week or two of hot temperatures, but there is little to no chance for any sustained heat, and above-average temperatures in September cannot create significant demand like it can in July or August."

The US "has consistently put in about 4 [Bcf/d] more this year than we should have," noted Jefferies & Co. analyst Subash Chandra. "I think this will continue until we get to the 3- or 3.25-[Tcf] range."

"What it boils down to is that we had a very cold spring and higher prices early on that allowed us in a couple of months to take the surplus to the five-year norm from the high 400s [Bcf] to near zero where it is today," said Stephen Smith, principal of Stephen Smith Energy Associates.

GAS MAY AGAIN BEGIN TO DISPLACE COAL AS GENERATION FUEL

"While we had prices in the $4.40 range starting out the season, we're now in a situation where it's hard to sustain a price above $4, or even above $3.75," Smith noted. "And that gets into gas and coal competition" for power generation.

"When the price gets up over $4, gas starts to lose demand to coal," Smith continued. "But then like a rubber band; the price snaps back. That price impact has been enough to offset even beneficial weather periods such as the cold spring."

"The cooler spring created sustained demand in the residential/commercial sector and limited injections in March and April," Reese said. "The storage surplus to the five-year average at the beginning of March was 269 Bcf, but due to the above average res/comm demand, inventories fell to a 118-Bcf deficit by the end of April -- a 387-Bcf swing in inventories to the five-year average within two months of cooler-than-normal weather."

The mild summer has "allowed injection rates to pick back up, with only one out of 10 weeks between April 26 and July 5 to record below-average weekly injections," Reese added.

In the power-generation sector in particular, Reese noted that higher gas prices in the spring "kept a lot of the demand out of the natural gas market that was present last year with the record inventory levels. Demand in the power sector continues to be above the 2011 average on a weather-adjusted basis, but has come off significantly from 2012."

That lower demand from the power sector "has allowed injections to remain robust," But Reese said that "as prices fall, coal should once again be displaced."

Reese added that "mild weather will continue to keep injection rates above the five-year average and continue to put downward pressure on prices. Low prices should [encourage] additional demand in the power sector, and we may see a return of coal-to-gas switching in the fall shoulder season to absorb the excess supply created by a mild summer and domestic production growth observed this year."

King said he thinks the market "will get back to a positive-growth demand picture in 2014, with the usual suspects of power gen and industrial demand." It remains to be seen whether price recovery will get more legs next year, particularly with any progress on LNG exports or new pipeline shipments to Mexico, he said.

Viswanath predicts that demand will rebound enough going into 2014 to whittle storage inventories down to their lowest point in nearly five years by the spring. Cold weather in November and December will be enough to overcome the impact of somewhat higher gas production trends this year, and the rest of the story will be on the demand side, she said.

Viswanath cites electric power demand as key. Utilities will switch back to gas from coal by the year-end 2013 as prices remain close to year-ago levels starting in October, she predicts, with power demand growing by nearly a half a Bcf/d in 2014.

--Stephanie Seay, stephanie.seay@platts.com
--Edited by Jeff Barber, jeff.barber@platts.com

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