US power generators switching from coal to natural gas will keep the gas market balanced this fall if gas prices remain in a range between $2.50/Mcf and $3.25/Mcf, analysts at investment bank Raymond James said Monday.
Through May, US utilities had switched over 6 Bcf/d worth of demand to gas from coal when compared with a year earlier, analyst Marshall Adkins said in a note to clients, but the pace of fuel switching will slow in the second half of 2012 as gas prices rise and weather becomes more normal -- by cooling down -- increasing the demand for power.
"Coal prices can't rise too high in the near term or the risk of too big a reversal in switching might once again put the US natural gas equation back on track to be oversupplied," Adkins said.
Further, Adkins said, a survey of publicly traded coal producers shows a 70 million st reduction in coal production in 2012 as coal burn looks to set to fall by 115 million st.
"Based on historic generation and fuel consumption rates, it implies that US coal burn will be down by the equivalent of 4.5 Bcf/day for the full calendar year, which jives with our switching estimate," Adkins said.
"The markets (via gas pricing) have worked to balance gas supply/demand via price and the coal market has been the sacrificial lamb to help make it happen," he added.
Gas prices will gradually improve compared with 2012's historic lows over the next few years because of the collapse in drilling for dry gas, lower oil prices, and more normal weather when compared with 2012's warm winter, Raymond James said. Any recovery in the price of coal will be limited by the retirement of older inefficient plants, the bank said.
"The gas price recovery should be slow and gradual because gas demand will be negatively impacted by switching from gas back to coal as natural gas prices begin to ascend," it said, adding: "Near-term, natural gas prices this fall are likely to remain rangebound in the roughly $2.50 to $3.25/Mcf range in order to maintain adequate coal-to-gas switching levels to keep the gas market from overfilling summer-ending storage."
