...More encouraging is that low prices have persuaded electricity generators all over the country to use gas-fired power plants over coal-fired ones where possible. Such switching boosted gas demand by an estimated six billion cubic feet a day in April, says Teri Viswanath at BNP Paribas. If maintained across the year, that would equate to an extra 9% of demand and use up most of the extra gas supply seen so far in 2012.HT: MarketBeat
Problem is, there are good reasons to expect fuel switching to slow. Demand for gas-fired power likely received a boost from an unusually high amount of nuclear capacity being closed for maintenance and refueling from mid-February through late March.
In addition, power generators tend to buy coal under multiyear contracts. So even if current prices tell them to burn more gas, the resulting buildup in coal inventories complicates the switching decision and also pushes coal prices lower—meaning gas prices must also fall to compete.
Arun Jayaram of Credit Suisse expects coal-to-gas switching to moderate to an average level for 2012 of 3 billion cubic feet a day. That is helpful but would likely not be enough to prevent gas-storage capacity being maxed out in the fall.
Raoul LeBlanc of PFC Energy says the good news is that the inventory problem "has to be solved by October." But he adds: "The bad news is that the problem has to be solved by October." In other words, the medium-term outlook for gas looks better given currently low prices and regulatory and economic trends favoring greater demand. Barring a rapid reduction in supply, though, the risk of a forced liquidation causing gas prices to plummet remains real this summer. Beware of a relapse.
Thursday, May 10, 2012
Posted by climateer at 8:53 AM