Energy Ink

Low prices see utilities favor natural gas over coal

March 27, 2012

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The good news if you’re in the natural gas business is that utilities are beginning to respond to low prices.

With the commodity’s forward curve slumping closer to US$2 per MMBtu in the past two weeks, market watchers have noticed an uptick in natural gas-fired power generation compared to coal.

ARC Financial Corp. chief economist Peter Tertzakian notes that current consumption levels defy traditional seasonal patterns.

Warm weather has all but obliterated heating demand this withdrawal season, keeping storage levels robust, but an average of 4.3 billion cubic feet per day of incremental volume has been burned so far this year compared to last by U.S. power generators, according to Tertzakian.

Gas, he writes, “appears to be taking on more of a steady role as it becomes a cheap substitute for the likes of coal.”

The shift could precipitate “an enormous increase” in U.S. gas consumption, analysts at New York-based research firm Sanford C. Bernstein say.

In a March 15 conference call, they predicted gas prices at $2.60 per thousand cubic feet could encourage some 450 million megawatt-hours of gas-fired generation this year.

The spike would boost U.S. gas consumption by 9 billion cubic feet per day, or a 13.5 per cent increase in total U.S. gas demand.

Which brings us to the bad news. Bargain basement prices are needed to sustain the shift, FirstEnergy Capital analyst Martin King points out in a note today, “in the low US$2s to possibly high US$1s” per MMBtu – “hardly a price bullish outcome,” the analyst says.

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