Abnormally mild U.S. weather over the past year has reduced natural gas demand enough to lead to a modestly oversupplied market, according to Raymond James analysts, who warned for the second time in two weeks that gas prices could hit $10/Mcf by the end of this summer.
The energy analysts unveiled their $10 price forecast in a report last week, a view well above most other analysts’ current readings of the market (see Daily GPI, June 28).
Referring to a standard 6:1 Btu parity ratio with crude oil, the Raymond James energy team, led by Marshall Adkins, noted that the gas-to-crude price discount began last year when a cooler-than-normal summer knocked out 200-300 Bcf of gas demand.
“Since then, it seems that many gas market analysts have forgotten about the cooler-than-normal-summer and the related gas demand destruction. Time for a little reminder,” analyst Adkins wrote. “After exploring 106 years of historical weather data and analyzing recent electrical generation trends, we think there is a high probability that summer gas demand will be much stronger than most are modeling. In fact, a return to ‘normal’ summer weather should lead to about a 350 Bcf increase in gas demand this July/August over the same time last summer.
“This type of demand shock would likely return gas prices to the 6:1 Btu parity ratio with crude,” Adkins wrote. “If crude prices hold near $60/bbl, then gas prices could be headed toward $10/Mcf later this summer.”
Average summer temperatures over the past 10 years “have been just shy of one standard deviation warmer than the 106-year ‘normal’ temperature distribution,” Adkins said. “While this doesn’t sound like a significant amount, the past 10 years on average have run warmer than 77% of all the observed summers since 1899.”
The summer of 2004 was “substantially cooler than either the ‘106-year normal’ or the more recent ’10-year normal.’ Last summer was 1.8% cooler than the 106-year average and approximately 3% cooler than the 10-year average. To put this in context, 92.5% of all summers since 1899 have been warmer than the summer of 2004. In other words, the statistical odds are very high that this summer will see warmer temperatures than last summer.”
The “warming trend has already begun, with June weather coming in warmer than normal and substantially warmer than last summer,” said Adkins. “Assuming the weather just returns to normal this summer, from an inordinately mild (or cool) 2004, we would expect to see electricity consumption return to the long-term 2.5% annual growth rate and set new demand records. In fact, U.S. electricity consumption for the first two weeks of June was also at its highest levels ever for this time of year.”
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