Natural gas contracts in the US have been trading at around $4/thousand cubic feet. The prime suspect for the low price is, surprise, the slow economy. The amount of natural gas being consumed has dropped, but since production has not slowed down as quickly as the economy, much of the gas being produced has gone into storage.

Now, however, the storage tanks are getting full. According to Platts, if production continues at its current pace and LNG imports are added in, natural gas in storage could reach 4.1 trillion cubic feet by October 2009.

That’s probably more than the available storage space, which is estimated at about 3.8 trillion cubic feet. Some analysts are saying that US gas producers need to cut production by 5 billion cubic feet per day beginning this summer in order to avoid a storage glut by fall.

The Europeans are facing exactly the opposite problem. Natural gas storage capacity in Europe is about half the capacity of the US, but it’s barely a third full. Europe gets about a quarter of its natural gas from Russia, and Russia has been shipping less gas to Europe due to the dispute with Ukraine, an extremely cold winter in Russia, and continuing production declines at Russia’s biggest gas fields.

Earlier this month, Chesapeake Energy Corp. (NYSE:CHK) said that it would cut production by 7%, or about 240 million cubic feet/day. At the same time, the company said it was considering an additional 10% cut in drilling. Since August 2008, Chesapeake has reduced its rig count from 158 to 110.

Storage injections over the summer will tell the tale for the 2009-2010 heating season. Falling rig counts and lower production in the US will try to stem the free fall in prices. The Europeans face the problem of trying to get more gas into storage to prepare for next year’s heating season. They are likely to rely on LNG shipments to make up for the uncertainties coming out of Russia.

From either side of the coin, natural gas storage presents a nearly unprecedented problem. Just one more issue to add to the list.

Paul Ausick
March 16, 2009

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