Forecasting increasing natural gas prices through the rest of this year, energy analysts at Raymond James said Monday their estimates indicate natural gas-fired power generation added 6 Bcf/d of demand year over year through May this year.

Analysts J. Marshall Adkins and James Rollyson said the demand growth came largely from fuel-switching and was achieved despite an overall decline of 1.8% in power generation.

"Given the observed pricing sensitivity between coal and gas generation competition so far this year, we would expect natural gas prices will still need to remain range-bound between $2.50 and $3.25/Mcf to balance the gas equation through November," the two analysts wrote in their report, "Coal Switching Part Deux."

Earlier this month Adkins and another analyst reported that an all-time record warm summer, combined with coal-to-gas switching, has created an "unprecedented" 1 Bcf/d swing in the year/year natural gas supply-demand balance, which they predicted would lead to higher prices through the second half of the year (see Daily GPI, Aug. 14).

So far this year the U.S. gas market has operated in line with what the Raymond James analysts called basic economic principles with price impacting demand. "Price competition between coal and natural gas for electric power generation has remained the key linchpin in balancing the gas markets this year," the analysts said.

Noting that the unprecedented growth in gas production during the past five years has not been matched by similar growth in demand, the analysts said the price signal sent to the market this year from plunging gas prices "worked brilliantly." The supply-demand balance "tightened in lockstep" with the price decreases, they said.

"Coal-to-gas switching really began to ramp up starting around last November, at about the same time that gas prices really started to fall off of a cliff," the analysts said. "We began the year thinking that summer-ending storage was theoretically on track to reach 4.5 Tcf (obviously not physically possible)...since then, the markets (via gas pricing) have worked to balance supply/demand via price and the coal market has been the sacrificial lamb to help make it happen."

Now the analysts see a "slow and gradual" gas price upswing because they see gas demand "negatively impacted" by the switching from gas back to coal in some parts of the nation. "That said, full recovery of coal demand will be limited by the retirements of older, less-efficient coal plants."

Similarly, executives with independent power giant NRG Energy Inc. have predicted a rally in natural gas prices that could push them up to the $3.50-low $4 range in the next two to three years. Senior executives at the Princeton, NJ-based company speculated that there may be the beginning of a reversal of the coal-to-gas switch for power generation, particularly in the Texas market, where NRG is the second-biggest generator.

NRG COO Mauricio Gutierrez said gas prices in some areas are beginning to approach the same level as eastern coal prices (see Daily GPI, Aug. 10).

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