Coal-fired generation trims gas use, analyst says

By the OGJ Online Staff

HOUSTON, June 25 -- If the current pace of coal use continues, it could displace up to one-half the previously predicted increased demand for gas-fired electric generation this summer, said a Houston analyst.

Coal-fired generation continues to rise a steady 4-6% higher rate than in 2000. If this pace were to continue, said Marshall Adkins, an analyst with Raymond James & Co., the new coal-fired electric supply could displace one-third to one-half of the increased demand for gas-fired generation previously forecast.

Because most of the increase at coal plants came from higher utilization not new capacity, Raymond James believes it will be difficult to keep up the same pace for the rest of the year. But rising activity at coal plants is just one of the factors helping keep the lid on gas prices.

Just a month ago, analysts at Raymond James believed gas prices would snap back from a June low to about $6/Mcf in July and August.

But now they say it's doubtful summer gas prices will spike that high after all and "could easily" fall back into the low $3 range before fuel-switching incentives move away from residual fuels and back to natural gas.

Henry Hub spot prices traded at $3.69 Friday, while gas in southern California dipped to $3.88, after trading for $8.25 June 18. Meanwhile, gas for July delivery closed at $3.74/MMbtu on the New York Mercantile Exchange Friday.

Stubbornly high
With oil prices in the high $20/bbl range, the equivalent price of residual fuel is about $3.50. Raymond James analysts had expected gas prices to fall below $3.50 by May.

Since gas prices have "stubbornly" stayed higher than residual fuel oil prices, gas demand has remained depressed and injections into storage have been exceptionally robust, Raymond James said in Monday investment notes on the energy industry. The US government reported about 100 bcf was injected into storage last week on lower demand and mild summer temperatures.

Nearly, 6 bcfd more gas was injected into storage than last year. "This year-over-year differential needs to contract substantially over the next month, or a strong summer demand won't even matter," said Adkins.

He said Raymond James will be watching injections into storage, the weather, and coal-fired generation to determine how robust gas prices will be through summer. If the weather is cooler than expected, gas-fired peaking units will not be fired up. If the temperature turns hot, gas demand should turn exceptionally strong.

Markets are beginning to realize there is too much gas in the system, and the only way to rebalance short-term supply and demand is to take gas prices down sufficiently to discourage fuel switching, Adkins said. "That means we are likely to see downward pressure on gas prices over the next month," he said. "Given that we expect gas prices over the next 4 weeks to continue a downward trend, it is reasonable to expect that we will likely be lowering our optimistic $5.50 forecast for the third quarter."