The upcoming natural gas supply/demand balance likely will continue to be “very tight” through the winter, and if the next few months prove to be colder than normal, gas prices could spike as high as $15-20/Mcf, Raymond James analysts said in the latest “Stat of the Week.”
Assuming normal winter weather, three gas drivers should lead to a tight gas market over the next five months, according to analysts J. Marshall Adkins and Darren Horowitz. The tight gas market could follow a prolonged 2.5 Bcf/d of hurricane-related gas supply disruption, substantially higher (4 Bcf/d) winter-over-winter gas demand on a normal to colder winter season, and the questionable availability of heating oil for fuel switching because of refinery constraints. “Again, this tightness assumes a 30-year normal winter,” they wrote.
Raymond James’ 2005/2006 winter gas supply/demand model suggests higher gas prices will have to kill about 1.8 Bcf/d of demand versus last winter to reach the minimum target of 800 Bcf in storage by the end of March 2006. Adkins and Horowitz modeled their estimates by adding estimated year-over-year winter gas supply/demand changes (625 Bcf) to last year’s total winter gas storage withdrawals (2,044 Bcf). The model estimates there will be 2,669 Bcf “likely” withdrawn this winter and 531 Bcf in storage at the end of winter.
“In real life, gas prices are likely to rise or fall, adjusting demand sufficiently to end the winter with a comfort level around 800 Bcf in storage,” they wrote. “The difference between the ‘theoretical’ 531 Bcf of ending storage and the more likely 800 Bcf of ending storage would be the amount of price driven demand destruction (or about 1.8 Bcf/d) required to balance the system.”
As for the long term impact of Hurricanes Katrina and Rita to gas production, “while we do expect the current 4.57 Bcf/d of shut-in gas production to improve, we believe that there is a high probability that an average of 2-3 Bcf/d will continue to be offline through Q2005 and into 1Q2006.” The figures do not include the 38 parishes in southern Louisiana not counted by the Minerals Management Service, which have capacity for 2.2 Bcf/d of onshore gas production, and have about 1 Bcf/d currently shut in. “Clearly, our 2.5 Bcf/d of estimated production outages could prove to be conservative.”
Liquefied natural gas (LNG) imports “will play a role in offsetting some of this demand,” but “we estimate that over the course of the winter demand season, increased LNG imports may only average approximately 1.0 Bcf/d higher than last year (or about 150 Bcf over the entire winter season).” They added that given the constraints on terminals, transportation and increased international demand, “it may not be feasible to expect much more cargo to hit U.S. shores in time to offset a potential demand spike this winter.”
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