Natural gas prices could bounce back from current lows and top $3/Mmbtu next spring, reflecting a industrial switch to gas from oil, a Houston energy analyst said.
Natural gas for November delivery was trading on the New York Mercantile Exchange Monday at $2.68/Mmbtu. Raymond James & Co. thinks gas could be priced at $3.50/Mmbtu and demand could rise 4-5 bcfd in the first quarter of 2002.
“As we enter the coming holiday season, we should start to see evidence of a year-to-year increase in gas demand,” said J. Marshall Adkins. Understanding last year’s decline in demand resulted from high prices not economic conditions is key to understanding the present outlook for gas demand and prices, he said.
Sharply higher prices last year contributed to a steep decline in gas use. Beginning in the third week of December 2000 and lasting until the end of March, Adkins said, year-over-year gas demand slid an “incredible” 5-7 bcfd. The US uses about 60 bcfd.
Raymond James estimated about two-thirds of the decline resulted from fuel switching by industrial customers, while the closure of plants accounted for the remaining one-third. If oil prices hold in the mid-$20/bbl range and gas prices stay below $3/MMbtu, Adkins said, “virtually all the fuel switching that moved to oil in early 2001 should move back to natural gas in early 2002.”
Moreover, some industrial users who shuttered plants when gas prices rose last year are beginning to restart mothballed facilities. Five out of eight ammonia plants in Louisiana were idled this past year, with plants in Texas, Georgia, and Arkansas affected as well. But some have begun to cautiously boost production, now that gas prices have fallen below $3/Mmbtu, Raymond James said.
Since ammonia production accounted for 10% of industrial demand and 3% of gas demand, the return of any of these facilities will boost gas demand, even if, said Adkins, some producers relocate overseas where gas is cheap and abundant.