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Goldman: Gas Bounty to Squeeze Coal Demand

Natural gas producers won't be the only ones feeling pain from the world's bloated gas supply and anemic recession-driven demand outlook. North American coal producers are poised for a hit as the gas market rebalances on the back of fuel switching from coal to gas for power generation, Goldman Sachs Group Inc. analysts wrote in a recent report.

"Natural gas generation costs have remained below coal generation costs since mid-January 2009," Goldman said. "We believe that these relative prices will likely incentivize substantial coal-to-gas fuel substitution for power generation in the eastern United States, helping to rebalance the [gas] market."

Coal producer shut-ins will occur before natural gas shut-ins based on coal cash costs of $50/ton -- or $4.40/MMBtu for gas equivalent -- which are above natural gas cash costs of $4.00/MMBtu. "...[C]oal has remained expensive, owing to high labor and health care costs and to declining productivity (tons per man-hour) in the region," Goldman said, adding that gas prices will remain at or below coal's breakeven cash cost of $4.40/MMBtu through the summer.

The Energy Information Administration also is predicting a greater demand for gas among power generators (see related story).

Goldman cut its average summer Nymex gas price forecast to $4.40/MMBtu from $5.35/MMBtu and cut its 2009-2010 winter Nymex gas price forecast to $6.00/MMBtu from $7.00/MMBtu.

Global demand reduction for natural gas due to the worldwide economic crisis as well as booming domestic gas production and expected hikes in liquefied natural gas (LNG) output later this year and next will all be felt in the United States. Goldman expects 700 MMcf/d of additional LNG volumes to reach U.S. shores this year. "Barring only the most extreme weather scenarios, we continue to believe that a substantial decline in production capex [capital expenditures], which is currently under way, will be required to help reduce production and absorb the excess gas," Goldman said.

However, even large cuts to capex likely won't tighten supplies enough to avoid breaching storage capacity constraints before the end of this summer, the firm's analysts said.

"Nevertheless, we argue that more substantial natural gas production shut-ins forced by sharp, downward price spikes will not be required this year to rebalance the U.S. natural gas market, as has occurred when inventories have approached max[imum] storage capacity in the past," Goldman said. "Instead, we believe that the market will rebalance owing to a combination of capex-related production declines and coal-to-gas substitution."

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