Solid reasons exist for bulls not to be discouraged by the current "pricing malaise" in U.S. natural gas markets, according to Deutsche Bank (DB).
In a report Friday, DB analyst Adam Sieminski detailed five scenarios compiled by the firm's gas analytics desk in Houston that offer evidence that gas prices will rebound.
At the top of the DB list is the use of more gas-fired generation to replace aging coal-fired plants -- a reason cited by other analysts in recent months (see Daily GPI, July 28, 2010). The Environmental Protection Agency (EPA) could make that case clear this month, said Sieminski.
Upcoming EPA rules, which could be challenged by lawsuits and federal legislation, still "appear likely to force the retirement of a large amount of coal-fired generation -- much of which would be replaced by gas-fired power," Sieminski said. The first of the EPA rules is scheduled for a decision this month, said Sieminski, which "could add up to 2 Bcf/d of demand over the next few years" (see Daily GPI, Feb. 2; Dec. 8, 2009).
The rate of economic expansion in the United States also is a sign of optimism for gas bulls, said the analyst.
"After a paltry 2.8% GDP [gross domestic product] growth rate in 2010, DB economics team expects 3.5% year/year growth in 2011 and almost 4.0% in 2012. This should help add other industrial demand to the healthy expansion of petrochemical gas use already being seen."
The DB team also said "the relative strength of oil versus gas is likely to drive marginal investment away from gas" and toward oil and natural gas liquids. "Furthermore, rising environmental concerns over hydraulic fracturing practices are likely to raise gas drilling costs (even though we do not believe fracturing will be banned)."
The "large gap between oil and natural gas prices is likely to lead to innovation on the demand side," said Sieminski. "We understand that most of the oil-to-gas switching that could occur likely has, but we do not want to underestimate the profit incentives associated with finding new ways to substitute cheaper natural gas for expensive oil in transportation and other uses."
Another reason for thinking that natural gas may be oversold relates to liquefied natural gas (LNG), Sieminski said.
"High global oil prices and the contractual ties of most international gas to oil parity will keep foreign LNG coming to the U.S. at contract minimums." However, "the potential for U.S. LNG exports should not be completely discounted. With no gas spike through even the coldest part of this past winter, the political acceptability of exports has risen and the temptation for companies to sink some capital into the idea has gone up as well in our view."
The Energy Information Agency on Thursday reported a draw of 85 Bcf in U.S. gas storage for the week ended Feb. 25 (see Daily GPI, March 4). However, bulls shouldn't be discouraged, said Sieminski.
"This was close to the median expected forecast, but the underlying data suggests a tighter-than-anticipated market," he said. "The latest data point to an end-of-winter storage number near 1,550 Bcf 'normalized' bottom followed by a 3,730 Bcf peak in November."
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