From the triple-digit weekly gas storage injections in the last three EIA storage reports, analysts at Raymond James & Associates calculate that there has been a 3-4 Bcf/d decrease in gas demand from fuel switching and a 0.75 Bcf/d increase in gas supply because of gas liquids being left in the gas stream due to low liquids margins.

However, those two factors will be impacting the gas market for only a short period, because of low NGL and fuel oil/distillate inventories, the analysts said in their Energy Stat of the Week. The analysts also noted the “equilibrium gas price” now appears to be somewhere between $5-7/MMBtu.

On the supply side, gas producers normally strip out high Btu liquids from the gas stream and sell them separately at higher prices. But when gas prices rise above liquids prices producers often leave some of the liquids in the gas stream, increasing the gas volumes.

“After examining recent NGL processing margins and production, we estimated that year-over-year 2003 natural gas supply has increased (or been overstated) by as much as 0.75 Bcf/d due to NGLs being left in the natural gas stream.”

The analysts said that processing margins for the first half of 2002 averaged $0.08/gallon compared to $0.04/gal during the first half of 2003 and $0.02/gal currently.

“This is not the first time we have seen this occur. In fact back in 2001 processing margins were impacted even more, prompting a greater amount of liquids to be left in the gas stream. As history tells us, however, this is not a sustainable trend.” Petrochemical companies who use NGLs has a feedstock will rely on inventories until they fall to low levels. Raymond James analysts believe that reliance on inventories can only last a short while this year because NGL inventories are well below the 10-year average.

“Due to the current low level of NGL inventories, we expect NGL prices to move up relative to natural gas, which would improve processing margins and NGL production. This in turn would lower the current ‘NGL supply cushion’ by as much as 0.75 Bcf/d.”

On the demand side, the analysts said they believe an average of 2.5 Bcf/d of demand has been taken out of the market because industrial and utility consumers have used oil instead of gas due to high gas prices relative to oil prices.

“We first began to see some potential signs of fuel switching last winter as a favorable oil to gas price spread emerged. In fact, as shown in the following graph, distillate and residual fuel oil consumption surged on a year-to-year basis, averaging over 500,000 b/d higher in the January through March timeframe.” Much of that, however, may have resulted from colder than normal weather.

The weather over the last few weeks, however, has been mild, yet distillate and residual fuel oil demand has averaged more than 400,000 b/d greater than last year. The increase in demand must be purely related to fuel switching, the analysts concluded. “Assuming the DOE numbers are correct, [two weeks ago we] saw the highest natural gas prices of the summer and oil product demand surged to its high of about 3.5 Bcf/d of equivalent gas demand.”

However, the oil inventory situation also should lead to increasing distillate and fuel oil prices. “If natural gas prices remain below $6/Mcf and distillate prices increase, then look for this fuel switching related demand to return in a hurry,” the analysts said.

As a result of low oil and NGL inventories, Raymond James analysts believe NGL and oil prices will be forced to move higher, limiting the decline in natural gas prices in the second half of this year.

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