Astronomical gas prices could push another 3.5 Bcf/d of gasdemand out of the market next year, according to a research note byCambridge Energy Research Associates yesterday. While the highgas-use markets, such as fertilizer and methanol producers, alreadyhave curtailed production significantly, CERA said it expects fourmore major demand responses: another wave of fuel switching toresidual fuel oil by industrial boilers, a surge of investment toincrease fuel switching capability, some potential switching todistillate oil and more industrial plant shutdowns.

CERA estimates the industrial boiler market already has begun toswitch small amounts (500 MMcf/d or less) to residual fuel oil fromnatural gas given the consistency of gas price premiums greaterthan $0.50/MMBtu. It also estimates that focused investment overthe next year could increase switchable load to reduce demand byanother 1.3 Bcf/d.

“As [gas price] premiums move far beyond this level [of 50 centscompared to resid], industrial end users can be expected to take acloser look at reinvigorating their switching capability beyondtheir initial short-term levels,” CERA said. “There is already somemovement here; given the impact of high gas prices on earnings,energy prices have already begun to receive management attention.”

In addition, DOE data shows industrial users have a theoreticalcapability to switch an additional 1.3 Bcf/d to distillate fuel inthe short term, CERA noted. Such a shift likely would increasedistillate prices, significantly reducing the amount of time theswitch could last, however.

CERA also forecasts additional losses of about 400 MMcf/d in thefertilizer and methanol industries because of plant shut-downs.Plant closings and production curtailments by fertilizer andmethanol producers already have taken 1-2 Bcf/d of gas demand offthe market.

Echoing the sentiments of many other gas market soothsayers,CERA predicts Henry Hub prices will average between $5.50 and $6.50next year because huge storage withdrawals this winter will bringworking gas inventories down to a record low next spring.Yesterday’s AGA report of a massive 158 Bcf withdrawal for the weekending Dec. 8 seemed to confirm those predictions. The drawdown was50 Bcf more than the six-year average. The Eastern Consuming regionused up 110 Bcf of gas last week, which was greater than theaverage withdrawal over the past six years for the entire country.U.S. working gas levels now are 588 Bcf less than at the same timelast year and 411 Bcf behind the five-year average.

“This deficit will reverberate through the gas market next yearand probably beyond,” the consulting firm said. “Indeed theenormous increases in storage injections that [are] likely to berequired next summer would keep the pressure on gas marketsthroughout 2001, although prices will fall off of the extremewinter peaks.”

CERA said if weather forecasts predicting colder-than-normaltemperatures through December end up being correct, storagewithdrawals likely will average 20 Bcf/d during the month, whichcompares with 17 Bcf/d last December and only 14 Bcf/d in December1998. “This level of withdrawals would leave only 1,846 Bcf instorage on Jan. 1, an inventory 663 Bcf below the year-earlieraverage and a record end-of-year low. Assuming normal weather, suchan inventory would place storage on track to reach a March minimumof 488 Bcf. 270 Bcf below the 1996 record low. At a U.S. inventorylevel this low, many storage operators would be dipping into basegas — gas which normally remains in place to support storagereservoir pressure — in order to ensure that service even to firmgas customers continues.”

CERA estimates 2.2 Tcf of working gas injections probably willbe required during the 2001 injection season — “which would benearly impossible to achieve” — if inventories are to reach evena record low level of 2.7 Tcf entering next winter.

“While a boom in drilling activity has reversed the decline inproduction, at this point we appear headed for only a 1.2-1.5 Bcf/dincrease in production during 2001,” CERA said. “While this willhelp knock down the price spikes of the winter, all of this wouldhave to be diverted to storage to bridge the inventory gap. Yet weknow that some will be needed to serve higher space heating loadnext year as well as the growth in power generation demand for gas.As a result only a portion can be used for storage injections —and a new record low in inventories entering next winter appearshighly likely.”

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