An “absolutely incredible” 9 to 12 Bcf/d reduction in naturalgas demand over the last six weeks, led by industrial users whohave either switched or shut down production, has been the primemover in the recent decline in storage withdrawals, according to areport by Raymond James Energy analysts. A continued rout ofindustrials could bring with it a significant reduction in overallindustrial output and a recession.
The 8-14% reduction in demand, coupled with a 5 Bcf/d or 3%increase in supply, translates to “about a 14 Bcf/d (or 17%) swingin both supply and demand variables as gas prices exploded.”
Of the total demand reduction, “it is incredible that a 5 to 7Bcf/d reduction in industrial consumption in gas represents a 25%to 35% reduction in gas-related industrial output. The obviousquestion that arises is how long can these industrial consumers ofnatural gas remain shut down until it begins to have a significantimpact on inflation and the overall economy?” the St. Petersburg,FL-based Raymond James analysts ask.
Using the ammonia industry as a case in point, the report notesthat as ammonia plants shut down in response to rising natural gasprices, the price of ammonia went up to the point where “ammonia isnow looking economically feasible at gas prices of $7-$8/Mcf. Infact, recent indications from ammonia companies suggest that theyare already beginning to bring more ammonia plants back online.”Since other industries could follow the same pattern, Raymond Jamespredicts the long-term loss of the industrial market should be morelike 10% to 20% (2-4 Bcf/d), rather than the current 25-35%. Buteven this “implies a meaningful hit to the U.S. economy.”
Noting that some of the additional supply brought on for thewinter is not sustainable, the group projects additional suppliesthrough the rest of the year will be in the neighborhood of 2Bcf/d. It concludes that “only about 7 Bcf/d of the current 14Bcf/d changes in the gas supply/demand equation are in factsustainable as we move through 2001.”
This “implies that we may be able to inject 1,200 to 1,400 Bcfmore gas into storage than we did last summer. By itself this wouldlikely be sufficient to drive gas prices back down to the sub-$4level.” But there is a caveat – new gas-fired power generation islikely to offset much of the sustainable supply/demand changes. “Webelieve that the current U.S. power situation will drive gas demandup another 6 Bcf/d this next summer. This means that U.S. gasmarkets this summer may only be able to inject 200 to 300 Bcf morethan last summer,” The Raymond James report states. “We stillexpect continued tight gas markets through 2001.”
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