U.S. Gas Low Enough to Boost Switch From Coal, Goldman Says
U.S. natural-gas prices are in a “stable” range that is low enough to encourage power generators to switch from coal and high enough to keep gas producers from cutting production, according to Goldman Sachs Group Inc. (GS)
The probability has increased that futures will miss the bank’s 2012 forecast of $3.10 per million British thermal units, Goldman said in a report e-mailed today. Contracts for March delivery on the New York Mercantile Exchange traded at about $2.54 today.
“While low Nymex natural-gas prices are motivating Powder River basin coal-to-gas substitution, power generation demand for natural gas has also increased in other regions of the country, resulting in very strong overall demand from power generators so far this year,” said David Greely, Goldman’s head of energy research in New York.
Coal demand in the U.S. is collapsing as power companies switch away from the fossil fuel to take advantage of the cheapest natural gas in 10 years. Use of coal to generate electricity will drop 2 percent this year to the lowest since 1992, while gas-fired consumption rises 5.6 percent, according to the Energy Department. Gas prices have tumbled to the weakest levels since February 2002 this year amid a boom in output and milder-than-normal weather.
Natural gas is the worst performer so far in 2012 among 22 commodities ranked by Bloomberg, amid an increase in U.S. output and milder-than-normal weather. Front-month Nymex futures are down 15 percent, compared with a 20 percent rally for silver, the biggest gainer. Use of coal to generate electricity will drop 2 percent this year to the lowest since 1992, while gas- fired consumption will rise 5.6 percent, according to a U.S. Energy Department outlook on Feb. 7. Upside Surprise
Gas use by power generators has risen 19 percent from a year ago to about 3 billion cubic feet a day, compared with an expected increase of 2 billion, according to Goldman. Coal-to- gas switching in the Central Appalachian, east of the Mississippi River, has “surprised to the upside,” it said. Appalachian coal is the U.S. benchmark grade.
Goldman said it continues to recommend investors buy U.K. National Balancing Point gas contracts for the fourth quarter, a call first made in April. The trade has lost 3.9 pence a therm so far, the report showed.
The U.S. is the world’s second-largest energy user after China. Coal accounts for about 45 percent of power generation and gas totals about 24 percent, Energy Department data show.
Combine that with CHK, ECA and COP cutting dry gas production and rising industrial demand as the US economy rebounds, and the situation may not look as dire as the market has been expecting; not to mention by next year, we will be 2 years away from LNG exports.