US coal displacement more price responsive than market believes: Barclays
Houston (Platts)--6Aug2012/408 pm EDT/2008 GMT
Coal displacement by natural gas is more price responsive than the
market believes, and for that displacement to be large enough to send US gas
storage down to around the 4 Tcf mark by the end of the injection season, gas
prices need to be lower than $3/MMBtu, according to a Barclays analysis
Implied coal displacement hit its peak during the third week in
April at 9.45 Bcf/d, when prices averaged below $2/MMBtu, but it pulled back
to the lowest level this year in July as prices rallied. July implied coal
displacement was about 2 Bcf/d year over year, the report said.
"There was a visible pullback in coal displacement as gas prices rose
above $2.50, which occurred in the recent rally that started in the middle of
June," the report said. "In July, implied coal displacement dipped to the
lowest level so far this year, while gas prices have been close to $3."
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US natural gas storage stocks rose by 28 Bcf to 3.217 Tcf for the week
that ended July 27, the US Energy Information Administration said last week.
The market has been buoyed by the steady decline in the year-on-year
storage surplus, the Barclays report said, with the storage overhang falling
from 880 Bcf to about 472 Bcf since the week ending on April 27.
On average, the pace of decline in the year-on-year storage overhang has
been running at about 3.5 Bcf/d, the report said, and with about 112 days
left from July 20 to the end of October, the storage overhang would need to
drop about 3 Bcf/d on average to allow it to finish the injection season at 4
"This might seem quite achievable, as all we need the market to do is
just reach the same rate of whittling away the storage surplus," the report
said. "In fact, an end-of-October storage finish of 3.9 Tcf might seem
achievable, which has led some in the market to conclude that gas prices will
remain above $3.00 for the rest of the injection season.
"However, our analysis indicates that coal displacement is sensitive to
gas prices not only on a month-to-month basis, but on a weekly basis, as
well. Therefore, we believe that it will not be possible to keep storage on
pace for a 4.0 Tcf finish (or lower) without prices dropping below $3.00 for
at least September and October."
Specifically, gas prices need to be in the mid-$2/MMBtu range to avoid
exceeding the 4 Tcf threshold, the analysts said.
The Barclays analysts also said daily implied coal displacement is more
correlated to daily gas prices than daily spot coal prices. But that may
simply reflect the fact that most coal is purchased under term contracts, the
Year-to-date coal displacement has averaged 3.6 Bcf/d higher compared
with 2011 levels and 7 Bcf/d higher compared with 2008 levels, when coal
displacement was negligible.
From March to May, implied coal displacement averaged 4 Bcf/d
year over year, the report said. That came as prompt natural gas prices
averaged about $2.29/MMBtu.
But absolute implied coal displacement by gas in June and July averaged
only some 3 Bcf/d higher year over year as gas prices averaged about
$2.64/MMBtu in those two months. The report noted the ability to displace
coal is constrained during peak power demand periods as essentially all coal-
and gas-fired units are running anyway during peak load.
Importantly, the report said, the drop-off in levels of coal
displacement from the March-May pace to July has had little effect on overall
gas demand and the steady decline in the size of the storage overhang.
"These results align very well with our running thesis on coal
displacement: it is more price responsive than the market believes," the
--Patrick Badgley, email@example.com
--Edited by Lisa Miller, firstname.lastname@example.org