Coal-to-gas displacement not to exceed 2012-2013 levels

At recent natural gas prices, analysts at Barclays Research said Friday that coal-to-gas displacement will not reach the heights it did in 2012 and 2013, with implied average coal displacement in 2014 of 2.5 Bcf/d, or about 74% of that in the previous year.

“While current prices certainly are lower than the high levels during the peaks of the winter, they are not lower than in years prior when we estimated larger amounts of implied coal displacement in the market,” analysts said in a report released Friday.

The NYMEX Henry Hub front month futures contract hit a 10-year low of $1.907/MMBtu on April 19, 2012. Dry natural gas production in April 2012 totaled 1.95 Tcf, compared with 1.87 Tcf in April 2011 and 1.73 Tcf in April 2010. The trend has continued with April 2013 output at 1.98 Tcf and April 2014 output at 2.07 Tcf.

Despite the upward trend in dry natural gas production, prices have been supported by record demand for natural gas during the polar vortex this past winter, leaving a large storage deficit at the end of March. According to the US Energy Information Administration, the winter of 2013-2014 led to a large drawdown in inventories, with stocks ending March 2014 almost 1 Tcf lower than the five-year average and at their lowest end-March level since 2003.Still, the storage deficit has narrowed amid cooler-than-normal summer temperatures and continued increases in natural gas production.

“The large storage deficit at the end of March has narrowed significantly so far this injection season — more quickly than in years past. As of September 5, EIA data indicated that the storage deficit to last year’s level had already narrowed significantly, but we believe that it will narrow further to about 300-400 Bcf by the end of October and for October storage to be around 3.5 Tcf this year,” Barclays added.

Given the weak demand for natural gas in the summer, Barclays analysts have lowered their average price forecast for Q3 2014 and Q4 2014 to $3.93/MMBtu and $3.95/MMBtu, from $4.40/MMBtu and $4.50/MMBtu, respectively.

Price targets have been revised lower for 2015 as well, in light of shifting demand sources and continued production growth, Barclays said. The average price for 2015 was lowered to $4.01/MMBtu from $4.24/MMBtu.

Coal displacement in 2015 is estimated at 2.7 Bcf/d, slightly above the 2014 target.

“While total demand will likely increase [year on year] in 2015, continued supply growth means that coal displacement will need to run at high enough levels to avoid filling storage beyond usable capacity in 2015. As a result, gas prices will hunt for the level that displaces just enough coal, while keeping storage at normal end-of-season levels,” Barclays said.

platts