Forecasts of US natural gas prices continue to slide.
Near-month futures contract prices dipped below $3/Mcf for the first time in over a year, on July 19 on the New York Mercantile Exchange. The August contract for natural gas dropped 14.8¢ to $2.94/Mcf on the NYMEX. The last time a near-term natural gas contract closed below $3/Mcf was for April 2000 delivery (OGJ Online, July 17, 2001).
Raymond James & Associates Inc., St. Peters burg, Fla., cut its third quarter forecast July 23 to $2.75/Mcf from $3.25/Mcf, its fourth quarter estimate to $2.50/Mcf from $3.50/Mcf, and for the full year 2002 to $3.50/Mcf from $4/Mcf.
In an investment note, RJA chief gas analyst Marshall Adkins said, "We cannot remember a time when there has been less visibility on all the fundamental gas price drivers." Over the past several months, gas storage injections have indicated there is 5-6 bcfd more gas deliverability in the US system than at the same time last year.
Market confusion
Given lagging data, it is impossible to determine exactly which supply-demand variables have changed to drive this year-over-year shift, Adkins said.
Robert Morris, industry analyst for Salomon Smith Barney Inc., said, "Natural gas price momentum has not really been affected by temperatures that, on average, have been essentially normal this summer." Moreover, he said, no prolonged periods of above-normal temperatures are expected during the rest of the summer season.
RJA's "best guess" suggested that about two thirds of the price drop is demand-related, while about one-third of the problem is supply-related.
In any case, Adkins said, it is becoming clear that the anticipated boost in gas-fired summer pow er demand is "simply not showing up," making the "runway just too short for summer gas prices to lift off."
Regardless of whether the year-over-year change is supply or demand-related, RJA projected that the US will reach near-full storage capacity well before the normal end of the injection season.
Meanwhile, Morris said US gas production during the second quarter is projected to be up 0.5% from first quarter this year and 3.4% above year-ago levels.
The American Gas Association earlier reported that natural gas injections into US underground storage facilities totaled 110 bcf the second week of July, the same as the previous week and up from injections of 70 bcf during the same period a year ago.
Those latest numbers included a one-time correction of 14 bcf. But even when adjusted to 96 bcf, Morris said, US gas storage levels now exceed 2 tcf and are 239 bcf higher than at the same time last year.
This could mean a substantial amount of gas will be looking for a home in October, creating gas-on-gas competition that is "likely to drive cash market prices down through the floor," Adkins said. He said the outlook is about the same for November-December, as unfavorable year-over-year weather comparisons make demand increases highly unlikely.
Demand uncertainty
Earlier, RJA predicted demand would slump, then "whipsaw" back in mid-summer when 40,000 Mw of new electric generating capacity was scheduled to begin operating, soaking up about 5 bcfd of gas. Now, RJA says, the incremental increase is more likely to be about 1 bcfd.
But Adkins cautioned that the actual summer change in natural gas-fired electric demand could range from an increase of more than 3 bcfd to a decrease of 1 bcfd. Adkins said he is more in clined to believe falling demand is largely responsible for the gas glut, but "unfortunately, we can't prove it."
He estimates that total gas supply will increase about 2 bcfd in the second half of 2001, but the increase could be 1-4 bcfd. In the short term, gas demand is in the hands of industrial users and plants that switched to other fuels when gas prices shot through the roof last year.
If prices continue to fall, Adkins said that fuel switching will begin to favor returning to gas and demand will likely improve 1-2 bcfd on a year-over-over basis. While harder to nail down because reliable statistics aren't available, Adkins estimated that industrial consumption fell 2 bcfd this year, or about 10% from 2000.
"For now, we are assuming that this industrial-related demand for natural gas remains depressed at current levels," he said, although comparisons between this year and last should begin to flatten and perhaps rise by yearend.
