CERA Sees Demand Squeeze Continuing
Astronomical gas prices could push another 3.5 Bcf/d of gas
demand out of the market next year, according to a research note by
Cambridge Energy Research Associates. While the high gas-use
markets, such as fertilizer and methanol producers, already have
curtailed production significantly, CERA said it expects four more
major demand responses: another wave of fuel switching to residual
fuel oil by industrial boilers, a surge of investment to increase
fuel switching capability, some potential switching to distillate
oil and more industrial plant shutdowns.
CERA estimates the industrial boiler market already has begun to
switch small amounts (500 MMcf/d or less) to residual fuel oil from
natural gas given the consistency of gas price premiums greater
than $0.50/MMBtu. It also estimates that focused investment over
the next year could increase switchable load to reduce demand by
another 1.3 Bcf/d.
"As [gas price] premiums move far beyond this level [of 50 cents
compared to resid], industrial end users can be expected to take a
closer look at reinvigorating their switching capability beyond
their initial short-term levels," CERA said. "There is already some
movement here; given the impact of high gas prices on earnings,
energy prices have already begun to receive management attention."
In addition, DOE data shows industrial users have a theoretical
capability to switch an additional 1.3 Bcf/d to distillate fuel in
the short term, CERA noted. Such a shift likely would increase
distillate prices, significantly reducing the amount of time the
switch could last, however.
CERA also forecasts additional losses of about 400 MMcf/d in the
fertilizer and methanol industries because of plant shut-downs.
Plant closings and production curtailments by fertilizer and
methanol producers already have taken 1-2 Bcf/d of gas demand off
Echoing the sentiments of many other gas market soothsayers,
CERA predicts Henry Hub prices will average between $5.50 and $6.50
next year because huge storage withdrawals this winter will bring
working gas inventories down to a record low next spring. AGA's
report last week of a massive 158 Bcf withdrawal for the week
ending Dec. 8 seemed to confirm those predictions. The drawdown was
50 Bcf more than the six-year average. The Eastern Consuming region
used up 110 Bcf of gas last week, which was greater than the
average withdrawal over the past six years for the entire country.
U.S. working gas levels now are 588 Bcf less than at the same time
last year and 411 Bcf behind the five-year average.
"This deficit will reverberate through the gas market next year
and probably beyond," the consulting firm said. "Indeed the
enormous increases in storage injections that [are] likely to be
required next summer would keep the pressure on gas markets
throughout 2001, although prices will fall off of the extreme
CERA said if weather forecasts predicting colder-than-normal
temperatures through December end up being correct, storage
withdrawals likely will average 20 Bcf/d during the month, which
compares with 17 Bcf/d last December and only 14 Bcf/d in December
1998. "This level of withdrawals would leave only 1,846 Bcf in
storage on Jan. 1, an inventory 663 Bcf below the year-earlier
average and a record end-of-year low. Assuming normal weather, such
an inventory would place storage on track to reach a March minimum
of 488 Bcf. 270 Bcf below the 1996 record low. At a U.S. inventory
level this low, many storage operators would be dipping into base
gas --- gas which normally remains in place to support storage
reservoir pressure --- in order to ensure that service even to firm
gas customers continues."
CERA estimates 2.2 Tcf of working gas injections probably will
be required during the 2001 injection season --- "which would be
nearly impossible to achieve" --- if inventories are to reach even
a record low level of 2.7 Tcf entering next winter.
"While a boom in drilling activity has reversed the decline in
production, at this point we appear headed for only a 1.2-1.5 Bcf/d
increase in production during 2001," CERA said. "While this will
help knock down the price spikes of the winter, all of this would
have to be diverted to storage to bridge the inventory gap. Yet we
know that some will be needed to serve higher space heating load
next year as well as the growth in power generation demand for gas.
As a result only a portion can be used for storage injections ---
and a new record low in inventories entering next winter appears