Rapid storage refill prompts fear of supply gut

05.12.2006
by Stephanie Gott Seay and Sean Murphy, Platts Gas Daily

The Energy Information Administration on Thursday reported an 85-Bcf storage build for the week ending May 5, boosting nationwide inventories near the 2-Tcf mark just five weeks into the traditional injection season.

The build, which raised stocks to 1.989 Tcf, came in above the 77-to 82-Bcf figure anticipated by most market observers and sent the June NYMEX gas futures contract downward.

In the same week of 2005, inventories stood at 1.501 Tcf. As a result, the surplus over the year-ago level expanded to 488 Bcf from 455 Bcf a week ago, while the surplus over the five-year average of 1.275 Tcf grew to 714 Bcf from 699 Bcf.

The record-high storage levels led Southern Natural Gas to project Thursday that maximum capacity at its storage fields could be reached before mid-summer. If recent trends continue, the pipeline could implement restrictions on all of its storage facilities “to preserve firm obligations and interruptible quantities,” according to a notice on its web site.

The firm also notified customers that storage transfers may be limited at the Bear Creek Storage field and nominations may not be accepted for interruptible storage service and park and loan injections.

Southern Natural operates two storage fields in Muldon, Mississippi, and Bear Creek, Louisiana, with a total working capacity of 60 Bcf. However, according to web postings Wednesday and Thursday, current storage levels are at 42 Bcf — “70% full and 16.5 Bcf ahead of [2005] for a similar time during the month of May.”

“We’ve been talking about this happening for a long time,” Phil Flynn, an analyst with Alaron Trading, said of Southern Natural’s predicament. “Essentially, it is the same thing as dumping gas on the market.”

The resulting gas glut could depress prices across the Gulf Coast, Flynn added. “Producers keep producing but where are they going to put it? It will be feast or famine this summer, and without an event to draw down storage levels there is no place to put excess gas.”

Economist Zhen Zhu at C.H. Guernsey noted that even if the upcoming hurricane season is active as predicted, storage inventories will likely reach 3.2 to 3.3 Tcf by November 1. If hurricanes don’t shut in much Gulf of Mexico gas and weather is not hotter than normal, that could become 3.5 Tcf to 3.6 Tcf.

“Given the normal production pace and current consumption patterns, there will be plenty of gas available on the spot market, keeping a lid on gas prices,” Zhu said. He predicted an injection in the 81- to 85-Bcf range in the next report for the week ending May 12.

EIA reported a net injection last week of 49 Bcf in the East region, bringing storage to 1.008 Tcf (959 Bcf a year ago), an injection of 12 Bcf in the West region, to 267 Bcf (255 Bcf a year ago) and an injection of 24 Bcf in the producing region, to 714 Bcf (690 Bcf a year ago).

In the East, inventories are now 400 Bcf above the five-year average, while stocks are 60 Bcf above the average in the West and 253 Bcf above in the producing region.