Mild weather, increased supplies and dampened demand have put more natural gas in storage than a year ago for the first time in 14 months. Once the American Gas Association revealed this, gas futures dropped to below $4 per million Btu. AGA reported injections totaling 99 billion cubic feet (Bcf) for the week ending May 25, which came on the heels of four consecutive weeks of injections of more than 100 Bcf each. That pushed national supplies to 1,281 Bcf, versus 1,274 Bcf a year earlier. "There's certainly been a rapid build in the last four to five weeks of injection, and a lot of us, me included, assumed this would be the case before we really get the weather demand pickup beginning in mid-June to July," Brad Beago of Credit Lyonnais Securities said. Increased supply has played a role. Greg McMichael of A.G. Edwards & Sons said first-quarter production from the top 27 U.S. natural gas producers, adjusted for acquisitions and divestitures, was up by only 1% to 2% year-to-year, or about 1 Bcf per day. But imports from Canada may have been up as much as 20%, or about 1.5 Bcf per day, he added. Thomas Driscoll of Lehman Brothers in New York said 46 producers-that account for about 65% to 70% of working gas production-reported first-quarter production increased 1.3% from fourth-quarter 2000 and 0.6% from first-quarter 2000. The U.S. Department of Energy has estimated Canadian imports and liquefied natural gas shipments rose an average of 1.1 Bcf per day in the first quarter, Driscoll added. Bob Morris of Salomon Smith Barney, meanwhile, said he expects 2001 U.S. production to be at least 3% higher year-to-year. But, Driscoll said, while production increases may have helped raise storage levels somewhat, a larger factor is plummeting demand. "We believe that demand has fallen about 6 Bcf per day compared with last year," Driscoll said. Morris said that backed-out demand from fuel switching and plant closures has been about 5 Bcf a day since late January. But this will ease as prices fall. "The demand that is currently absent is obviously demand that existed one year ago, when natural gas prices were at roughly $3.50 per MMBtu," he indicated. "Thus, as natural gas prices continue to subside, or perhaps even at current levels, much of this year-over-year backed-out demand should begin to come back to natural gas in increments down to $3.50 per MMBtu due to both the reversal in fuel switching and economic-driven factors." -Jodi Wetuski

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