zman’s Energy Brain

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Natural Gas To Approach All Time Record Inventories

Posted by zmann on October 4, 2006

Thursday I expect a build of 60 to 65 bcf, putting us just shy of record storage levels. We need 73 Bcf to top out but this number is just for the last week in September. We’ve got 5 more weeks to go so don’t right that check to any Amaranth wanna be hedge fund just yet. Based 5 yr average injection rates, we should top out just under 3.6 Tcf, or nearly 300 Bcf over record levels!  Anything under 60 Bcf tomorrow will spark fears of demand creation or  unstated supply curtailments leading to a continuation of the modest rally in front month gas futures this week.

The out months are telling a different story with the 24 month gas strip approaching backwardation. We’ve NEVER had this much gas in storage.True, it’s estimated that with a normal winter followed by a normal summer and typical 1 to 2% demand growth that the surplus will erode. Those things wouldn’t hurt. Maybe it will happen. However, my money is on the short side.

You don’t need to pay $6 /mcf to support a 50% increase in service and drilling costs since 2000. You don’t need to pay $6 / mcf when stories out of the E&P companies for years were that “all the easy stuff’s been drilled” and supply is headed down.  Then where did the Barnett Shale, the Fayetteville Shale, and numerous blossoming CBM plays in the rockies come from.  I’m not calling for gas to fall to $2 like the last time storage was…nevermind, there wasn’t a “last time”.  I do think that gas needs to fall to between $3-4 for the 12 month strip, and day rates and services need to fall commensurately.

Oh and don’t forget about those rise Pacific Ocean sea surface temperatures. El Nino is coming and he likes it warm in the winter.  But maybe the summer will be hot…

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