As the gas industry enters the peak summer demand period, market perception has largely flip-flopped from fear of shortage to the assumption of adequate supply for power generation and storage injections despite the growth of power demand this year, according to Energy Security Analysis, Inc. (ESAI). “We can make it now,” appears to be the prevailing attitude, the research and consultation firm said.

In the group’s most recent North American Natural Gas Stockwatch, ESAI said that through July 13, year-to-date power generation was 1.8% above the same period in 2001, while summer power generation was up 4.9%. Assuming the additional generation is gas-fired and that regional heat rates are similar to 2001, ESAI said it believes the added generation would imply that gas demand has increased by 4.7 Bcf/d nationwide. Consulting Edison Electric Institute’s (EEI) regions, the group found that electric demand in the Central Industrial, Mid-Atlantic, West Central, and Southeast regions of the United States is driving this large year-on-year increase.

“Regionally, the additional electrical demand would suggest that gas consumption has increased by about 1 Bcf/d in these EEI regions,” said Mary Menino, senior analyst at ESAI. “In contrast, pressure on gas deliveries to California has been relatively modest due presumably to electric demand management measures.”

ESAI noted that although the additional electrical output in California translates into about 180 MMcf/d in natural gas, the availability of more hydro capacity in the Northwest has likely reduced that need. Due to gas production keeping pace, industrial demand remaining down and the efficient use of stored gas, ESAI said the added gas demand for power generation has not been a more bullish force in the gas market.

ESAI said emotion rather than reason or fact has dominated the gas market since last winter. Despite the warm winter and ample gas in storage at the end of the heating season, the gas market did not allow prices to fall-off during the spring. The group pointed out that underpinning this resistance was a fear of shortages due to predicted declines in North American gas production at the same time the electric power sector was bringing online a significant amount of new gas-fired capacity (55,000 MW since last summer). “And there was no relevant data to subvert the fear,” ESAI said.

In the short term, ESAI said it believes the abrupt return to fundamentals has caused prices to somewhat overshoot, and that a slight upward correction is in order. “August is likely to bring some protracted heat in much of the country and along with that the likelihood of a increased unplanned generation outages,” the ESAI said. “So, despite the relief the market is experiencing, we are not out of the woods yet in terms of sufficient gas for power generation. We expect that August prices will average $3.10/MMBtu.” The group added its band of 90% confidence spans $2.50 to $3.70/MMBtu.

Looking to early fall, ESAI said it expects prices to drop reflecting nearly full storage and significantly lower demands from the power sector. However, if there is a significant decline in drilling activity or if producers and traders continue to “meltdown” due to past illegal trading activities and deceptive financial reporting practices, this could rekindle market anxiety and push up prices, the group said.

“As winter starts, we expect that deliverability will begin to be tested and prices will strengthen,” ESAI added. “If November and December are unseasonably cold — as in 2000 — this could spark real concern over the adequacy of supplies and would act as a much more bullish force on prices.”

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