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 yesterday. 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 the market.

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. Yesterday's AGA report 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 winter peaks."

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 highly likely."

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