Gas in temporary oversupply, analyst says

By the OGJ Online Staff

HOUSTON, Apr. 23, 2001 — While many forecasters are concerned about a natural gas shortfall, gas analyst Marshall Adkins estimates there is about 5 bcfd more available on the market right now than at this time 1 year ago.

Adkins, director of energy research for Raymond James & Associates, attributes the temporary surplus to a combination of lower demand and more supply. He estimated demand is down about 3 bcfd as a result of fuel switching and 1 bcfd from lower industrial demand.

“Regardless of the origin of the extra gas, it is clear that there is substantially more gas available to inject today there was there at the same time last year,” Adkins says in the firm’s Monday research notes.

The short-term oversupply is projected to push prices down through May and possibly June to below $4/Mcf. But as gas-fired electric generation gets fired up to meet summer power demand, Adkins then expects prices to shoot up to $6/Mcf and remain “relatively” strong at $5/Mcf thereafter.

Raymond James expects this summer’s peak electric demand to be 5-10 bcfd higher than last summer based on the assumption about 40,000 MW of new gas-fired generation will be added to the grid this summer. On a yearly basis, Adkins says, this amounts equals about 4 bcfd of additional consumption.

Adkins cautions the number is somewhat misleading because about 2 bcfd of additional consumption will be used in base load generation, while the balance will be consumed in peaking units used for short periods of time. He estimates these units could burn an extra 5-10 bcfd during peak summer use.

Two alternatives
He points to two possible alternatives for the market to play itself out in the next month. Storage operators may inject large amounts of gas over the next few months. While this would support cash prices, high gas injections could cause the current 303 bcf year-to-year storage differential to disappear “in a matter of 5-6 weeks,” Adkins says.

Such a large boost in storage numbers would cause the futures market to weaken. By late July, however, Adkins says, traders will grow less comfortable as electric generation siphons gas from storage and drive prices back up.

Alternately, storage operators may inject less gas than is available to the market, and cash prices will drive the futures market down. Under this scenario, Adkins says, storage operators will spread modestly higher injections throughout the entire storage season.

Last year the industry injected 1,717 bcf to reach 2,750 bcf in storage. Adkins estimated to reach the same number this year, the industry must inject more than 2,000 bcf or an additional 1.5 bcfd throughout the season.

Still, that would not be enough to absorb the surplus and there would be 1-2 bcfd of gas without a home through June, pushing cash prices down, according to Adkins. But, he says, the good news is storage operators would then be short of their injection goals in July and August and would likely bid cash prices up to $6/Mcf or more.

In any case, Adkins says, its seems clear gas prices are in for another wild ride this summer.