Record natural gas use by U.S. utilities is tightening supply/demand balances sooner than the market was expecting, setting the stage for natural gas bulls to come charging back, according to BNP Paribas.
Even though the recent rally is concentrated only in the "very front of the curve," BNP's Teri Viswanath and her team said they see "an important shift in fundamentals" suggesting that the domestic gas futures curve will steepen earlier than anticipated.
"The weekly reported storage injections have decidedly fallen behind the pace witnessed in 2011, raising the prospect that the industry might not be as oversupplied as previously anticipated," Viswanath noted.
"We had originally assumed that the electric power demand growth would slow dramatically later in the injection season with more moderate weather," she wrote. "Yet recent data suggests otherwise. Based on monthly power plant filings, we see a trend emerging in the form of partial displacement of baseload coal power plants by natural gas generators.
"This phenomenon, coupled with the ability to lock in low gas prices, suggests that fuel-switching will continue to limit the summer build in inventories. Indeed, we see the distinct possibility that the industry might end the injection season with only modest amount of working gas in storage in excess of 2011. This development, in our view, will allow a resurrection in prices toward $4/MMBtu by next year."
Electric power demand growth was anticipated to slow "dramatically" later in the injection season as weather moderated. However, recent government data points otherwise. In the Energy Information Administration's (EIA) most recent Electric Power Monthly report issued last week, gas-fired generation was found to have displaced coal "in every region" of the United States, said Viswanath.
The Southeast continued to have the highest levels of fuel competition, with 30% of the gains, or 1.54 Bcf/d but the coal-heavy Midwest "unexpectedly" registered the second highest gains with 24% of the annual electric power demand growth, or slightly more than 1 Bcf/d, noted BNP.
"This development is relatively important as most fuel-switching to date has occurred in a limited number of census regions," Viswanath noted. "The trend revealed by individual monthly power plants makes an even more compelling case that a structural shift in favor of natural gas units is underway. While the industry has already flagged the displacement of mid-merit coal generators, the more recent data suggests that baseload coal units are also under threat."
Based on BNP's revised supply/demand projections, working gas in storage should exit the summer at a level of about 3.84 Tcf, which in turn would lift gas prices in 2012 -- and prepare them for more a more dramatic shift higher in 2013, said Viswanath.
"This projected increase of just 1.36 Tcf of inventories during the current injection season is the smallest build in more than two decades and falls far short of analyst expectations. For 2012 we have adjusted our price forecast higher from $2.34 to $2.76/MMBtu to better reflect lower end-of-season stockpiles.
"In 2013, we expect prices will correct more dramatically to $4.00/MMBtu (revised from $3.68) in response to rapidly receding inventory levels."
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