While some experts expect the economic slowdown to shave significant gas demand from the market this winter, Raymond James & Associates believes there will be a substantial shift toward greater year-over-year gas demand comparisons by mid-December. The investment bank said that high prices last winter drove about 8-10 Bcf/d of demand out of the market in the first quarter of 2001. At least half of that demand should be back by the first quarter of 2002, it said.

“The key to understanding why natural gas demand should be up dramatically in the first quarter of 2002 is recognizing that the reduction in demand in the first quarter of 2001 was more price-related than it was economy-related,” Raymond James said in its “Stat of the Week.”

“Now that natural gas prices have retreated to the sub-$3 per Mcf range, we expect fuel switchers to come back to natural gas and industrial consumers to begin to restart their plants.”

Other observers are a little more concerned about the economic downturn. WEFA Inc. said in its Natural Gas Monthly report yesterday that it expects gas-weighted industrial demand to be down 3.5% during the fourth quarter compared to 4Q2000 and 0.9% during the first quarter compared to 1Q2001.

However, Raymond James believes that about two-thirds (6-7 Bcf/d) of the industrial demand loss last winter was related to fuel switching. “If oil prices hold in the mid-$20 range and natural gas prices remain below $3 per Mcf, then virtually all of the fuel switching that moved to oil in early 2001 should move back to natural gas in early 2002. That amounts to a [year-over-year] demand increase of 3-4 Bcf/d from fuel switching alone in the first quarter of 2002.”

Industrial gas demand today accounts for about 20 Bcf/d of consumption. While experts expect the U.S. economy to backtrack by 1-2% this year, Raymond James said it is important to note that industrial gas demand last January had contracted 10-20%. Even with the current economic situation, it still means industrial demand will be up from last winter, according to Raymond James.

“In this sea of bad sentiment surrounding the demand picture for natural gas, we believe that we have indeed spotted the lighthouse. As we enter the coming holiday season, we should start to see evidence of a year-to-year increase in gas demand. This will primarily stem from the reversal of last year’s switch to residual fuel and higher end distillates as well as the return of some of the price sensitive industrial demand.” Raymond James said it expects to see first quarter gas demand up 5 Bcf/d compared to 1Q2001. “This increase in demand and the show of positive year-to-year storage withdrawal differentials should spur gas prices and lend credence to our $3.50/MMBtu 2002 gas price forecast.”

WEFA isn’t so optimistic. “The most important force is that working gas storage at the beginning of the heating season will be at its highest level since 1992. Our estimate is that working gas storage will end October at between 3,150 and 3,200 Bcf, over 450 Bcf (3 Bcf/d over the heating season) higher than last year. A recession is expected to reduce industrial gas consumption and cause very little growth in power consumption during the fourth quarter of 2001 and the first quarter of 2002 compared to [the prior year]. Also West Texas Intermediate is trading in the range of $22 to $23 per barrel compared to $30 to $34 per barrel last heating season. Finally, a return to a more normal hydro year could reduce natural gas consumption between 0.5 and 1 Bcf/d during 2002.” WEFA expects gas prices to average $2.79/MMBtu in 2002 with 2% colder than normal weather this winter.

©Copyright 2001 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.