Although the recent climb in Lower 48 natural gas prices is currently being interpreted as “unusual,” Lehman Brothers chemical analyst Sergey Vasnetsov said expensive U.S. natural gas could become “normal” in 2003-06. In Lehman Brothers’ first “Natural Gas Fever” report, Vasnetsov said a major “step-up” in the future average natural gas price could have profound implications on the U.S. chemical industry.

As a result of indicators, the analyst said, “We are raising our medium-term (2003-2006) base assumptions for average natural gas prices from $3 to $3.75/MMBtu (annual average, with higher seasonal prices in winter and summer).”

Vasnetsov said the United States has been “blessed with cheap gas” with prices in the 1990s averaging $2.07/MMBtu, with low 15% volatility in annual prices. “Obviously, it was very helpful to chemicals, one of the major [gas] consumers, due to low absolute costs of production,” Vasnetsov said. “The oil/gas price ratio was also high at 9.8 times, which helped U.S. chemicals in relative terms, compared with oil-based Western Europe and Asia.”

The report showed the chemicals industry is responsible for about one-half of all industrial consumption of natural gas in the United States. Because of this fact, Vasnetsov said an understanding of the use of natural gas (and natural gas liquids) by chemicals companies, including price sensitivity, will become “increasingly critical” to understanding the future of the natural gas markets.

The report noted that U.S. total natural gas consumption dropped by 3% in 3-4Q2000, when prices shot from $3 to $8/MMBtu, while U.S. ethane-based ethylene producers cut consumption by 10%. “Our concerns is that price-insensitive customers could ‘crowd out’ chemicals by bidding up gas prices,” he said.

“For the past three years, natural gas prices seems to have reached a new, higher ‘normal’ range of about $3.5-4/MMBtu (driven by 6x of oil/gas price ratio), based on structurally tighter supply-demand,” Vasnetsov said in the report. “We would love to see prices return to a sustainable level of $3 or below, but should not count on relief.”

Looking forward, the analyst said the supply-demand situation for U.S. natural gas shows symptoms of the “Fever.” From 2003-2006, Vasnetsov said the supply is tight, with an expected decline in U.S. production, a plateau in Canadian imports, and only a slow increase in LNG imports. However, demand is expected to increase, along with expected U.S. industrial recovery and heavy reliance of new electric power plants on natural gas as the energy source.

The new price level will likely impact chemical manufacturers hard. “[Gas] Fever will be felt in ethylene, propylene and in their derivatives: polyethylene, ethylene glycol, VAM, oxo-chemicals,” Vasnetsov said. “We expect less pressure in styrenics, PP and VCM, while cl-alkali and TiO2 are relatively insulated from Fever.”

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