Coal-to-gas switching, increased power generation use, a slight uptick in industrial demand and a few gas field shut ins have helped a bit to reduce U.S. gas storage levels, but unless weekly storage injections remain below 2 Bcf/d through the rest of the injection season, some energy analysts think maximum levels will be reached by mid September.
In their gas versus power updated forecast on Friday Tudor, Pickering, Holt & Co.'s (TPH) Brandon Blossman and George O'Leary said gas prices needed to be "nearer to the bottom" of the $2.00-2.75/MMBtu range to clear maximum gas storage, with coal/gas switching continuing at around 2 Bcf/d, "but at a new higher-base switching level." TPH issued a forecast in March but since then, "mild weather-driven gas demand losses" have been partially offset by increased power generation market-share gains, said Blossman and O'Leary. Coal demand was "hurt twice -- once by gas market share gains and again by lower overall power demand."
According to TPH, 1Q2012 heating degree days were down 22% year/year (y/y) and 16% versus normal, and gas demand fell 3.5% y/y. Since the start of the second quarter, five of the six weeks of gas storage injections have been "in line or better than historic norms," and in fact, the bullish numbers launched a recent gas rally, with the near-term strip up 25% in the past four weeks, the TPH duo noted. Power demand, however, remains flat, and coal output overall is off 12% y/y -- although slightly better than in 1Q2012.
"Cheap gas and sticky coal prices plus mild winter weather pushed power generation coal demand to all-time lows...off 8% y/y in November, growing to a staggering minus 21% in December/minus 25% in January, easing only slightly to minus 18% in February," said TPH analysts. "We model March off 19% with subsequent improvement as summer weather demands more of the entire generation fleet...coal included."
There's no doubt, however, that "gas continues to amaze," they said. Even with the mild weather, with overall power load down 3% year-to-date, gas demand was plus 20% in January and plus 29% in February. If the recent gas power generation market share gains were sustainable through the year, storage capacity wouldn't be an issue, said the TPH duo. But temperatures will increase, as will power demand, and there will be less idle coal/gas generation available to swap market share.
"Gas storage will hit peak capacity well before historic fall peak given current levels and an average injection season," wrote Blossman and O'Leary. "From this point, the forward market needs to be at least 2 Bcf/d undersupplied to clear storage capacity."
With storage levels now at about 2.7 Tcf, that's 42% (790 Bcf) above the five-year average and 57% (970 Bcf) above the 10-year average, noted the analysts. "Historic injection build from this point forward averages 1.8 Bcf/d over trailing five- and 10-year averages, and at that rate, "we'd hit max storage levels by mid September."
Canaccord Genuity's John Gerdes and Ryan Oatman on Friday were a bit more optimistic because of the heavy coal/gas switching in the market. They reiterated the firm's $3.50/Mcf gas price forecast for 4Q2012. In April the full-year 2012 gas price forecast was cut by 75 cents to $2.75 and the 2013 estimate was trimmed by 50 cents to $4.00, with the long-term outlook remaining at $5.00. They also stood by comments made last month that more downside for gas prices appeared limited because of significant coal/gas switching and a falling rig count, which suggests less than a 50% chance the gas market experiences acute price weakness this autumn.
"While our Nov. 1 storage estimate has crept up to 4.1 Tcf from 4.0 Tcf, our gas-fired power demand estimates are likely conservative," they noted. "Our model indicates the gas market has tightened from 1 Bcf/d oversupplied at year-end and 2 Bcf/d undersupplied a month ago to 4 Bcf/d plus undersupplied versus '11 levels on a quarterly moving average basis excluding weather effects. Coal-fired generation should tumble 12.5% versus a year ago due to further intensification of coal-to-gas fuel switching in a sub-$3 gas price environment. Additionally, hydroelectric generation should revert to historic norms from last year's elevated level (the highest since '97). Accordingly, we feel gas-fired power should experience an almost 5 Bcf/d increase this year."
Canaccord's expectation for y/y average gains in gas-fired power of less than 5 Bcf/d "implies a significant decrease from current levels of 7 Bcf/d plus, per Bentek Energy [data] and 6 Bcf/d plus, per February Energy Information Administration power data."
"The gas output decline of 0.4 Bcf/d decline in Lower 48 production in February should prove to be a head fake as 1.2 Bcf/d of shut-ins masked underlying growth," said Gerdes and Oatman. "Gas production should rise 0.5 Bcf/d sequentially in March before growth tapers off later this year."
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