Hannoverian, according to Morgan Stanley we should get the required reduction in natty demand from gas-to-coal switching, viz.:
2. Gas-to-coal switching should balance the market
again during the injection season
Rebuilding storage will require shutting in some
gas-based generation. Regardless of where end-Mar stocks
land, the gas market will balance via gas-to-coal switching
during the injection season (Apr-Oct). YoY production growth
of 2.4 bcf/d will largely offset net demand and export gains of
~2.7 bcf/d, leaving power to make up the difference (between a
YoY end-Mar inventory deficit and a slightly lower YoY end-Oct
inventory target). If end-Mar storage comes in at 1.1 Tcf, we
estimate gas-to-coal switching will have to reduce power gas
burn by ~2.2 bcf/d YoY to reach an end-Oct storage of 3.6 Tcf.
Given the large inventory deficit, the market does not need
to price as low to support power demand. Prices now need
to rise YoY for end-Oct storage to reach 3.6-3.7 Tcf. However,
the market tends to underappreciate the elasticity of gas power
demand above $4.00/mmBtu. At the current Apr-Oct strip
(~$4.75/mmBtu), gas power demand would likely slip by
3.5-4.0 bcf/d over the injection period. Dispatch economics
suggest $4.35/mmBtu should be sufficient to achieve a 3.6 Tcf
end point (assuming a 1.1 Tcf end-Mar starting point). Key
targets for switching include SERC and PJM. Although coal
retirements and basis issues could dampen price elasticity, we
account for these issues and note that the lower inventory in
the East helps mitigate some of the PJM basis risk.
Peak heating demand has limited switching efforts thus
far. Coal generators in many ISOs have been running near
their peak summer output levels in recent weeks showing that
coal generation can still ramp up with price incentives. Extreme
cold weather across the country has kept overall power load
elevated; while extraordinary high regional gas prices led to an
increased reliance on coal generation. However, many PJM
coal plants tripped and failed to produce power when called
upon, which increased the region’s reliance on gas generation.
All these events supported gas power demand, masked the
large increase in coal generation and limited the power sector’s
ability to switch from gas to coal, even as gas prices rose.
However, we will see more gas-to-coal opportunities as
we exit the heating season. As weather-related demand
declines seasonally, overall power load will also decline. This
will provide power generators with more optionality between
coal and gas generation. If gas prices remain elevated during
the lower-demand shoulder seasons, we see tremendous
opportunities for generators to switch out of gas and into the
coal stack. The caveat is that Northeast basis issues and/or a
hot summer may reduce some of the sensitivity of power to gas
pricing.
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Above is from their 2/20 update. EOS storage is now looking like it will be closer to 0.9 TCF vs. the 1.1 TCF that MS had been calling for in that 2/20 report. So, using their model, instead of natty prices having to average $4.35 for the injection season they will have to average something closer to $4.70, which is about a dime higher than the current strip. |
