Commodity Online
NEW DELHI: With industrial consumption down, much of US natural goes this summer is going into storage. Industrial gas demand makes up for about one third of the total demand which has now plummeted due to financial crisis.

Output at key gas-intensive consumers, such as the chemicals or metals industries, is contracting rapidly, and natural gas usage at refineries also remains low. On the other hand, domestic natural gas output is still expanding, while the gas balance in neighbouring Mexico continues to loosen up, according to a Merrill Lynch report.

A key downside risk to NYMEX US natural gas prices this summer stems from a tide of liquefied natural gas imports. Up to 5.4 bcf/d of new global LNG capacity could come on line in 2009.



At the moment, the unwanted LNG vessels are heading to the UK and France to replenish low gas inventories following Russian gas disruptions and very cold weather this winter. But Europe has limited spare storage capacity.

To avoid attracting the floating molecules, US natural gas prices will have to stay below UK prices. But the US-UK spread has narrowed recently as UK summer gas prices fell. Combined, a weak domestic gas balance and a global LNG surplus could put further downside to US natural gas prices this summer, Merrill Lynch said in its report.

With 3Q09 currently pricing at $4.40/mmBTU, prices temporarily slipping below 2.50/mmBTU cannot be ruled out. However, what could help balance the market is lower domestic output , a cap to LNG imports and some coal-to-gas switching, cannot be ruled out.

The only potential upside to gas consumption comes from fuel-switching of coal into gas in the South of the United States. And at the margin, that is starting to happen. While overall power generation declined by 3% in February, natural gas use for power production actually increased by 2.4% relative to last year. Power producers, like AEP and Duke, now face a situation where gas competed with coal in marginal units last month.

The other big downside risk to US natural gas prices this summer certainly stems from a tide of liquefied natural gas imports. LNG production capacity is rising this year, with potentially 5.4 bcf/d of new capacity coming to the market. True, delays
and operational problems have pushed exports from these new liquefaction plants back towards the latter part of this year. Still, at least five big projects in Qatar, Indonesia, Yemen and Russia—adding 50 million tons per year to global
LNG capacity of 270 million tons—are scheduled to come on line in 2009. Moreover, a large percentage of these incremental volumes, particularly those from Qatar, are scheduled to be delivered into the Atlantic Basin, Merrill Lynch said.

On the positive side, in 2010 weather uncertainty and further cuts in US natural gas output should lend support to prices. Therefore, Merill Lynch expects NYMEX summer-winter natural gas spread to continue to widen in the coming months.

The balance in the US natural gas market is very loose Henry Hub natural gas prices have now sunk to 2002 lows and the US natural gas market balance remains very loose. Despite a colder-than-normal winter,natural gas inventories have drawn at the slowest pace in decades.

Tumbling industrial gas demand and shrinking power generation completely overshadowed the cold weather this winter. Moreover, despite a one third reduction in gas rigs counts from the October peak, US natural gas producers are still churning out even more gas than last year. US natural gas prices will still face downside risk this summer until the market finds a balance towards the end of the year, Merill Lynch said in its report.

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook