Friday, October 14, 2016 11:54:02 AM
Thursday, 13 October 2016 2:53 PM ET
By Bill Holland
Replacing retired coal plants with gas generation will be a "long-term tailwind" for natural gas prices, with the possibility that gas will start to command a "scarcity premium" it has not seen in 10 years, Guggenheim Securities LLC analyst Subash Chandra told his clients on Oct. 13.
That premium may come sooner than Chandra expects.
Jefferies LLC analyst Jonathan Wolff predicted this coming winter will see sharp price spikes on cold weather after the Oct. 13 weekly storage injection report came in smaller than expected, trimming the storage surplus to less than 1% above last year.
Dealing with the long term picture, Chandra said announced coal plant retirements will add up between 0.5 Bcf/d and 1.0 Bcf/d in both 2017 and 2018. Guggenheim thinks there will be another 33 GW of coal retirements after 2016, only half of which have been announced.
"The coal retirements are occurring in the regions that burn the highest amounts of coal on a gas-equivalent basis and have some of the lower gas capacity utilizations," Chandra said. "We suspect expanding gas infrastructure will continue to flip these markets to natural gas over time."
A wild card in all these calculations is the impact of renewables on the dispatch stack, but Chandra said wind and solar were not competitive threats this summer since July gas injections were low, indicating power burn, while renewable capacity was at a record high.
"It is important to note that renewables output can be seasonal," Chandra said. "As a result, gas may bear a greater burden of baseload and peaking loads than total capacity numbers suggest. This could result in more gas price volatility and hence a 'scarcity' premium in the price – for the first time in nearly 10 years."
"NYMEX price spikes could appear on even short cold snaps" this winter, was Wolff's reaction to the smaller-than-expected storage build reported on Oct. 13. "Given a bloated northeast pipeline network, short-term cold snaps could lead to a greater 'call' on Gulf Coast supply and create price spikes. Our outlook for gas remains: 2017: $3.50, 2018+: $4.00. Our top gas ideas [Range Resources Corp. and Rice Energy Inc.] can capture ample NYMEX pricing."
There's little risk that higher summer gas prices will begin to destroy demand or that coal can backfill for gas if prices climb, Chandra said, and he expected coal capacity to decline irreversibly. Chandra forecasted a $3.25/MMBtu price for 2017, well below the threshold for gas demand to be destroyed.
http://www.snl.com/web/client?auth=inherit#news/article?id=38012591&cdid=A-38012591-12593
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