Natural Gas storage capacity is nearly full, says Morgan Stanley's Stephen Richardson. Domestic producing region working gas storage stands at 1,059 billion cubic feet, about 10 billion cubic feet short of the record levels of November 2007, and 265 billion cubic feet above the five-year average for the last week of July, he says. Also, Western Canadian storage is "near all time highs and likely reaching full conditions." As a result, gas prices are likely to remain "under pressure" in the near term. "We have seen increasing evidence of shut-in and delayed production from E&Ps in second quarter results and, as Chesapeake Energy indicated last week, the industry is likely to see further curtailments and forced shut-ins over the coming months," says Richardson. Despite nearly full gas storage, most gassy E&Ps will not take a hit to stocks prices based on storage, he says. "The equities traditionally look beyond periods of high storage to the promise of improving fundamentals," he says, referring to the 2006 and 2007 storage seasons when the stocks outperformed in periods of storage fills and near-term price weakness. "However, this cycle is different, and the 2010 outlook for the commodity is more important for the equities. On this front, we expect continued evidence of production declines and expect growing optimism surrounding third-quarter U.S. gross domestic product to continue to prove supportive," says Richardson. Meanwhile, E&Ps have outperformed other energy sub-sectors since early-July lows, and some have benefited from the cyclical recovery in commodity price. Richardson says although full storage alone won't derail the equities, gas demand stabilization, production declines and crude strength have to be maintained for the E&P outperformance to continue.