Will US natural gas recover soon?

We wrote last week that research from BarCap suggested there may be some cause for optimism at least on the global LNG glut, because prices in Europe are steady and there is available regasification capacity storage there.

But sentiment in the US natural gas market remains grim.

Gas producers, in tones reminiscent of the oil industry, say that lower prices now will lead to delayed production, storing up a future steep rise in demand. One of the most-emailed posts today over at SeekingAlpha argues that this is a fallacy, because gas supply will quickly increase again, and that increasing LNG trade will see imports put more pressure on the US gas price level.

However an analyst from Barclays Capital says that the outlook may not be so good for the US. Cheaper gas, said Michael Zenker, could displace an average of 6,000 MW of coal-fired capacity this year. One coal-fired generator said low gas prices had affected its off-system sales, the report notes, and some plants have recently switched from coal to gas.

So demand from the generating sector is predicted to rise, but Barcap’s Michael Zenker says this will not be enough to put a floor under the price.

Although some displacement has been reported already, it would
theoretically take a displacement of about 16,000 MW of baseload coal plants, or some 6% of all coal-fired capacity in the Eastern Interconnection, to boost gas demand in the power sector by 2 Bcf/d, an amount high enough to push gas prices higher, Barclays said.

Coal prices in some areas are simply too cheap to be undercut, contracts are too long and the time frames required to switch from coal to gas are also too long to help stabilise the gas price, he said.

But some are still advancing the argument that gas prices will recover. Somewhat off into the medium term, Guy Caruso, a former US government energy official, says cap-and-trade would benefit gas prices as coal will become less attractive, and he believes nuclear will not increase substantially. Even with aggressive renewables targets he says gas will have to play a big role.

In the shorter term, Sentiment Trader observes that put volume has leapt, and other such spikes, in the past seven months at least, have tended to coincide with “a temporary stop to the blood-letting in the contract”.

Related links:
Coal displacement will not prevent gas price falls: Barclays
(Platts 29/04/09)
The slow leak in gas (Sentiment trader, 28/04/09)

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