More fuel switching is the only “logical, near-term solution” to balance supply and demand for natural gas going forward, according to latest Raymond James’ Energy “Stat of the Week.” Fuel switching has to occur, said analysts, to “squeeze out 5 Bcf/d of natural gas demand.”

“The last time that the natural gas supply/demand balance got out of whack, those that could, first switched over to burning residual fuel oil,” according to analysts. “That makes perfect sense, since it is typically much cheaper to burn versus other higher-end distillates. However…demand for residual fuel oil this time around has been down from where it was a year ago, until this month. This is despite natural gas prices that have been well above the economic threshold to switch and with significantly colder weather versus the same period last year.”

Analysts estimated that despite the cold periods this winter, it appears there has been only a small amount of fuel switching, “perhaps the equivalent of 1 Bcf/d.” Accordingly, Raymond James analysts believe that there will be even more fuel switching this summer.

“Based on the continued apparent shortfall in natural gas supply implied from both weekly gas storage data and recent gas producer data, fuel switching must increase over the next several months,” said analysts. “Specifically, natural gas storage levels currently stand at a mere 1,014 Bcf, with still at least five weeks of withdrawals left to go.”

Raymond James analysts said that assuming either higher prices drive more near-term fuel switching and/or low pressures restrict withdrawals, “we are currently assuming we reach the all-time low ending storage level of around 700 Bcf — although we could be even lower.”

In taking its analysis one step further, the analysts projected supply/demand changes for the upcoming summer injection season compared to last year. “Assuming that the year-to-year U.S. production shortfall is cut in half by easier comps and increasing rig activity (a conservative assumption), there should be about 3% (1.5 Bcf/d) less available gas this summer.

“Additionally, we are assuming no improvement in demand due to the economy and less demand as a result of weather, since last summer was warmer-than usual,” said analysts. Raymond James pegs sustainable natural gas prices above $5/Mcf “so long as oil prices remain at $25/bbl or above.”

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