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US gas over USD 3/mmbtu

 
27.07.2012

Having averaged USD 2.50/mmbtu (USD 88/kcm) for the YDT and touchied a low of USD 1.91/mmbtu (USD 67/kcm), US gas prices have just breached the USD 3.00/mmbtu (USD 105/kcm) mark.

In our view, there are two principal reasons for the rise in the gas price: first, the drop in gas-directed drilling seems to be stabilising US gas production after six years of growth and second, concerns that US storage would be full before the withdrawal season starts have abated.

Gas storage was at record levels at the end of the mild winter, but the injection rate has been running at lower than normal levels, lessening the risk that storage would hit the buffers which could result in a price collapse.

The comparatively low storage fill rate, despite high production levels, reflects increased consumption primarily as gas has proved price competitive with coal in power generation. This has resulted in gas-fired power generation virtually equalling coal-fired power generation for the first time ever in the US.

However, at much above USD 3/mmbtu, gas starts to lose its competitive edge and generators might again turn to coal. Given that inventories remain well above the normal range, there is still a risk, in our view, that extreme price weakness couldreturn if switching back to coal kicks gas demand down hard enough.

For the longer term, though, we continue to expect that inadequate drilling economics at the USD 3/mmbtu (USD 105/kcm) level will carry on pressuring the supply side, making a longer term outlook of USD 5/mmbtu (USD 177/kcm) realistic. At that level, US LNG would price at around USD 10.6/mmbtu (USD 374/kcm) delivered to Europe, which would not be particularly price competitive. 

Colin Smith
VTB Capital analyst

Tags:
USA, gas, dollar, Europe

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