Raymond James: Gas Use Undermined by Nukes

As most investors and analysts continue to scratch their respective heads in search of evidence as to why the country's natural gas storage facilities are continuing to fill at an exceptionally fast pace over the past three months despite falling prices, Fred Schultz, of Raymond James & Associates, thinks the answer might lie in an overlooked indicator, namely nuclear power.

With gas prices dropping due to a lull in demand, Schultz points toward a recent increase in nuclear power production, which has stolen some of the nation's gas-fired electric generation market.

"Relative to natural gas, nuclear power has reduced gas-fired electric demand by an estimated 1.5-2.5 Bcf/d over the past six months and should peak at about 3.5 Bcf/d late this fall," Schultz said in a Raymond James Industry Brief. "This we think the market is beginning to understand. As we have been saying for months, even more aggressively lately, is that gas prices will probably bottom sometime this fall, partly due to these extra Bcfs floating around the system."

However, Shultz said what the energy markets are not taking into account yet, is the fact that nuclear power production is about to reach its peak, and then drop off through 2002 due to repairs and refueling. "In our minds, the nuclear mystery has been solved and the death of the natural gas cycle could prove short-lived," Schultz added.

After careful research and studying, Schultz said that the country's nuclear power fleet is currently at an all-time record performance level in the neighborhood of 97+ GW. He said that a significant amount of nuclear generation is slated to come offline in 2002 for repairs and refueling because the fleet has been run hard for the past two years. The main beneficiary of all this stands to be gas-fired electric generation.

Based on historic data, Schultz said the nuclear fleet utilization next year is expected to drop to under 91% heading into summer 2002, compared to the historic high of nearly 97% this past summer. Even more revealing is that Raymond James expects 2002 nuclear production to be negative year-over-year (Y-O-Y) from May through December, providing a catalyst to gas consumption during the summer months of next year.

"Based on our work, we see the Y-O-Y return of between 1.0 to 1.5 Bcf/d of natural gas demand when nuclear production hits the production cliff next spring," Schultz concluded. "While we have generally been cautious short term on gas prices the past few months, we have begun to identify or fill in some portion of the gas demand quotient for next summer. Unlike this summer, next year is shaping up to be a far more bullish year for gas, based on the need for gas-fired electric production."

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