The operational limits of some portions of the North American gas-storage system may be reached this fall. This creates the potential for an abrupt decrease in gas prices as some storage fields become unable to accommodate additional gas injections, Cambridge Energy Research Associates (CERA) reports. Absent a warmer-than-normal summer or significant gas-supply disruptions caused by hurricanes, the Massachusetts-based energy-research firm expects North American gas-storage inventories to reach 4.2 trillion cubic feet this October 31-a more than 95% fill of expected working-gas storage capacity. Given end-of-cycle physical limitations on injections, and expected average September and October storage injections-11 billion cubic feet (Bcf) and 10.2 Bcf per day, respectively-approximately equaling injection capacity, the firm believes that some gas-storage fields, especially in the eastern U.S., won't be able to accommodate additional injections of gas. "In today's North American gas market where prices are market-responsive, insufficient storage working capacity to accommodate all the gas available for injection is likely to lead to a sharp and swift drop on spot gas prices," says CERA director Ken Yeasting. However, as gas prices fall toward $5 per million Btu, displacement of coal-fired electricity generation by gas-fired generation will provide additional demand and thus support gas prices and rebalance the market, says Yeasting. Separately, Dan Pickering, head of Pickering Energy Partners, a Houston-based energy-research firm, believes that without intervention from Mother Nature, "it is increasingly apparent that the natural gas environment will get worse before it gets better." To avoid completely full storage levels at the end of the injection season, gas markets must see 2- to 3 Bcf per day of increased demand or decreased supply, contends Pickering. In the face of high inventories, Nymex gas prices have nonetheless remained relatively strong, averaging $6 this June; $10 for this coming December; and $8.50 for the 12-month strip, he adds. "As such, there is limited economic incentive for reduced drilling." He concludes, "Unless current incentives change or hurricanes again ravage offshore gas supply, the gas markets are headed for an ugly showdown over the next few months." He notes that the current situation is eerily similar to 2001 when a natural gas "air pocket" made life quite painful for investors for several quarters. "It could take the remainder of 2006 to sort out the gas markets and return to a healthier gas supply/demand equilibrium."

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