Friday, June 1, 2012

Forbes Magazine Gets Right Coal-Gas Competition Right

Entitled "Shale Gas Takes On Coal To Power America's Electrical Plants," Forbes Magazine published an astute an article on how the battle between coal and gas for electrical generation market share is affecting pricing of both fuels. It is well worth reading.

Other than weather, currently the most crucial factor affecting natural gas prices is demand for gas from power plants.  Indeed, gas would be below $2 but for the significant switching from coal to gas in the last 8 months.

But the success of gas in gaining electric generation market share has caused US demand for coal to drop significantly and coal prices have dived in response.  At this point, any gas price around $2.75 or even a bit lower would cause significant switching of generation back to coal.  And that is one fundamental reason that the price recovery of gas since April hit a wall around $2.60.

The now intense coal-gas competition for power plant demand will be another obstacle to a return to even $3 gas pricing next year.  Such pricing for gas, in the next 12 months, will hinge on either much more significant declines in gas production than has been seen so far in 2012, or another major source of new demand.

In the short run, major new demand could only come from the combination of a hot summer and then a cold winter. That's always possible.

But the odds are growing against that combination. Rising average temperatures make the hot summer more likely but the cold winter less so.

All that adds up to the likelihood of gas prices remaining below $3 longer for many more months.

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