With natural gas stocks up, power plants could switch from coal

With natural gas stocks up, power plants could switch from coal

Washington (Platts)--13Jun2006

With underground natural gas storage stocks running ahead of usual this year,
many analysts are predicting prices will fall and power plants, which switched
from natural gas to coal when supply tightened and prices skyrocketed, could
switch back (CO 6/12).

As of last week's Energy Information Administration natural gas storage
report, 2.3 Tcf was in US underground storage, compared with 1.9 Tcf at the
same time last year. Although actual capacity is unknown, most believe it is
about 3.5 Tcf.

"We continue to believe in the longer-term coal story, and expect the
retrenchment will ultimately prove to be a good entry point," Morgan Stanley
analysts Mark Liinamaa and Carlos De Alba said in a report Friday. "However,
we caution investors that the group could prove volatile with a weakening
basis in the near-term."

OTC coal price weakness, high gas inventories and injections into storage
remain high, they said. "Front-month gas has reached the $6/MMBtu range. We
estimate that dispatch from marginal baseload coal plants could be reduced at
$5 to $5.50 gas. We believe this price is required for three-month gas, but
the desire to rebuild coal stockpiles could provide additional incentive to
switch on a short-term basis."

But prices will have to fall even lower to have a long-term effect on coal,
they said. "While we believe that marginal switching could happen around
$5.50, we believe $4 to $4.50 gas on a sustainable basis is required to have a
long-term impact on coal. Nonetheless, we believe natural gas could dominate
coal sector sentiment over the next few weeks."

Gas analysts expect prices to fall lower

Although he expects a hefty gas storage surplus through the summer, Deutsche
Bank Chief Energy Economist Adam Sieminski doesn't think a price crash is in
the offing because Gulf of Mexico hurricanes and demand growth from power
plants switching from coal will keep a floor under the market.

If storage inventories continue to build at their present pace, they will hit
3.8 Tcf by Halloween. "It's fright night if we get that," Sieminski told an
audience of economists at a National Economists Club luncheon Friday in
Washington.

But Sieminski, citing government and private forecasts for an active hurricane
season, said he expects storms to cut into Gulf of Mexico production this
summer, which should strengthen spot prices. In addition, he said he has
observed electricity generators switching to gas from other fuels.

"We're already seeing substitutions at this price level," Sieminski added.
"With $6[/MMBtu] gas, it makes sense to switch out of coal. ? More and more
we're seeing fuel oil and coal being displaced by cheaper natural gas."

Yet over the longer term, Sieminski expects little growth in the country's
thirst for gas. "Electricity will use up only a little," he said, adding that
high prices over the past couple of years have led to declines in residential
and commercial consumption while keeping industrial usage flat.

Earlier in the week, two other analysts predicted natural gas prices could
fall to $5/MMBtu.

"As new evidence of stretched storage capacity surfaces, gas futures will
likely be subject to continued downward pressure, until prices become low
enough to cause power generators to switch from coal to natural gas," Fimat
analyst Antoine Halff said Thursday.

RBC Capital Markets analyst Joseph Allman thinks gas prices will drop another
$1 to $1.50/MMBtu and could hit $4/MMBtu this summer in reaction to the
oversupply of gas in storage.

Natural gas closed at $6.22/MMBtu Monday.

--Mark E. Heckathorn, mark_heckathorn@platts.com and
--Bill Holland, bill_holland@platts.com

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