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'Where is that gas going to go?' Full storage expected to depress prices

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'Where is that gas going to go?' Full storage expected to depress prices

Naturalgas buyers expect U.S. gas storage capacity to top out the tanks at about 4 Tcfthis year, dropping gas prices to historical lows.

"Wecan talk about hot summers — they will have an impact on power burn — but I thinkthere is a chance we will see prices we haven't seen in 25 years," Todd Mitchell,purchasing and stores manager for NorthAmerican Stainless, said at the LDC Gas Forum Southeast in Atlanta.

"Storageis going to be under tremendous pressure this summer," Mitchell explained tothe audience of a gas buyer panel. "We have very high levels in the groundnow. Essentially, storage can only go up maybe another 1.8 [Tcf], maybe stretchit to 2 Tcf. The last time we saw that low amount of build in the summer was 2012,and since 2012 there is an additional 10 Bcf per day being produced. Where is thatgas going to go?"

NorthAmerican Stainless operates a steel mill in Ghent, Ky., that uses about 4.5 Bcfto 5 Bcf of gas per year to produce more than 1 million tons of stainless steelsheet, strip and long products annually.

Monthlyaverage Henry Hub spot prices could remain below $3/MMBtu through December. TheU.S. Energy Information Administration recently forecast that Henry Hub gas will average $2.18/MMBtu in 2016,a decrease of 3% from the previous month's forecast.

Tim Sherwood,vice president of gas supply at AGLResources Inc., agreed that storage will fill. "Depending on howearly in the injection season that occurs," he said, "then you might seethe potential for a real depression in gas prices if you get full storage and stilla lot of supply coming into the market, but I guess time will tell on that."

Sherwoodsaid he does not expect the Lower 48 storage situation to appreciably affect AGL'suse of its own storage. Utilities generally use storage more for operations thanfor financial hedging and trading, and much of AGL's storage is aquifer storage,which has to take in and release gas at a controlled rate.

"Wedon't typically try to catch the falling knife on what the right price to put gasin storage is," Sherwood said.

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SteveHenderson, CFO of Patriots EnergyGroup Inc. and York CountyNatural Gas Authority in South Carolina, said warm weather and low gasprices this winter had prompted Patriots "for the first time" to leavegas volumes in storage for withdrawal the following winter. "So we did changeour strategy a little bit," he said.

"Likeeveryone else, I think 4 Tcf is going to be close to full at some point, and theshoulder months could be interesting," Henderson said.

Thereare market forces that could support gas prices. Mitchell said U.S. industrial activityand the resulting demand for gas are increasing. Capital for new industrial projectsis moving to the U.S., he said, "but it takes time." Mitchell noted thata North American Stainless expansion took three years from planning to operation.The U.S. steel industry is also picking up after a preliminary judgment found Chinaand other countries were dumping steel products in the U.S.

"Weexpect it to be a very good five to 10 years," Mitchell said.