Stolen from another thread..bullish gas article (I still see further weakening in the energy sector, the OSX is leading the way down..but we'll see<g>
"Analyst says power plant demand will overwhelm gas industry
By the OGJ Online Staff
HOUSTON, June 29 -- Investment banker Williams Capital Group LP, New York, says US natural gas supply must rise a nearly "preposterous" 50% to more than 33 tcf by 2004 to serve electric generation in development.
With 90% of a proposed 350,000 Mw of generating capacity scheduled to be gas-fired, unprecedented amounts of new net gas production will have to emerge in the next 3-5 years or just 40-45% of these gas-fired plants will actually get built, said Christopher R. Ellinghaus, the firm's energy analyst.
Although independent power producers and other electricity suppliers hope to have 300,000 Mw of new generating capacity on line by 2005, it is doubtful that much more than 100,000 Mw will be possible over the next 3 years, Ellinghaus said.
He expects adequate gas supplies will be available to supply new plants built this year and in 2002, when 43,000 Mw and 36,000 Mw, respectively, are scheduled to come on line. But in subsequent years, he anticipates there will only be enough gas to support 20,000 Mw of new construction, even if supplies grow at 1-3%/year.
While gas prices have plummeted from $10/MMbtu this winter to under $4 and storage injections are high, Ellinghaus said July will test peak supply capabilities. Fuel for new power plants for the next 2 years will actually come from the "destruction" of existing gas demand in the commercial and industrial sectors, he said.
Industrial demand destruction
But there are only so many "pizza parlor ovens" and other small users that can be shut down before getting into core use, Ellinghaus said. "We do not believe that demand destruction and modest net production growth will allow much more than the [power] plants under construction for commercial operation in 2001-2002 to be completed."
High demand certainly opens the door to LNG imports, which Ellinghaus predicted could grow to 750 bcf/year, enough to fuel about 15,000 Mw of generation. But even if industry "went crazy" over LNG, imports wouldn't be sufficient to serve the anticipated need, he said.
As a result, investor fretting over the potential for overbuilding, falling spark spreads, and lower spreads in the forward markets is overblown, Ellinghaus said. With gas prices of about $4/MMbtu, electric power prices of just under $50/Mw-hr will produce a "very strong" spark spread of about $25/Mw-hr for combined cycle generators, he said.
The firm's projections are based on electricity demand rising about 3%/year, somewhat higher than most forecasts. Demand has risen 3.1%/year for the last 5 years, except for 2000, when demand rose an estimated 3.5%.
If the analysis is correct, tight supplies should raise prices for gas and thus electricity production costs, regardless of price mitigation efforts by regulators, Ellinghaus said. Regulatory meddling could delay new capacity additions, and regulatory uncertainty could restrict financing for new capacity, the firm concluded.
While facilities that are constructed will ease tight power markets and reduce political pressures to control prices in the near term, high gas prices and electricity price volatility are likely to continue. Only if new coal-fired or nuclear power plants come on line in significant numbers, Ellinghaus said, are shortages likely to be abated. Generators would have to build 200,000 Mw of capacity fueled by coal or uranium to meet long-term demand, he said.
However, because of the lengthy development cycle and public policy concerns, new plants relying on these energy sources will not begin to come on line in sufficient numbers until 2005 or 2006, Ellinghaus said, and waste disposal issues will continue to dog the nuclear industry"
...not so bullish
"Frederick P. Leuffer, CFA - Integrated Oil
July 3 is an important day for oil: OPEC meets and the current phase of Iraq’s oil-for-food program expires. Nearly all OPEC ministers have indicated their intention to leave production quotas unchanged, at 24.2 million b/d. The quota does not include Iraq. If smart sanctions are put on the back burner and the oil-for-food program is extended for another six months, as some members of the UN Security Council espouse, then Iraq could begin exporting up to two million b/d of oil sometime next week. If Iraq does not resume exports, then we believe the rest of OPEC will increase production by cheating on quotas. It is important for OPEC to put on a good face, if it wants to avert a further decline in oil prices. However, as Saudi Arabia and others have stated, they will raise production to make up for lost volumes if Iraq stays out of the market.
This could be a major problem for oil prices when Iraqi exports resume. The debate in the UN over what to do with Iraq appears to be at a standstill. Our bet is that the U.S. softens its stance and backs a six-month extension. We believe the loss of Iraqi exports is the only thing that has prevented oil from dropping to $20/bbl or lower. Crude inventories in the U.S., as reported by the American Petroleum Institute stand at 313.5 million bbls, a level that in the past has been consistent with prices in the $18-$20/bbl range. Assuming that Iraq produces at the same level it did in May (2.9 million b/d), and OPEC holds production flat with May volumes, the total 27.6 million b/d would exceed our estimate of the call on OPEC oil by about 800,000 b/d. Under this scenario, the downward pressure on oil prices would build. If Iraq does not resume exports in the next few weeks, OPEC would see a gap between supply and demand of some 1.2 million b/d (by our estimate) that needs to be filled. As we have stated repeatedly, the fundamentals do not support oil prices in the mid-$20s/bbl or higher. The surge in oil prices to above $37/bbl last year is reflective of abrupt inventory corrections, and Saudi Arabia’s preference for high price volatility, and not a secular trend toward higher sustained prices, in our view. Oil price volatility has increased and is expected to stay high. Oil stock prices have corrected in recent weeks along with oil, refined product, and natural gas prices. However, we remain negative on the major oils and independent refiners as a group. Based on our published projected price ranges, we estimate the international integrated oils pose just under 20% risk, the domestics pose just over 20% risk, and the refiners pose about 27% risk. In our view, better buying opportunities in this sector lie ahead." |
