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The roughly 40% crash in North American gas prices since mid-July has left benchmark front-month Henry Hub near $8 per million Btu. With previously skimpy US gas inventories now growing rapidly, even more downside potential exists, some traders claim. But the dive is likely to be brief, as $8-$9/MMBtu is at or near the floor that most analysts think the US market can sustain for long. Recent strong production growth could quickly flag at these levels, given high drilling costs (WGI Aug.20,p8). And equally, if not more, important in the next few months could be the demand response.
Analysts at Goldman Sachs calculate that in August it became cheaper to burn gas than to burn Appalachian coal for power generation in the US for the first time in four years. Calgary-based First Energy Capital concurs: "North American natural gas has literally become the cheapest hydrocarbon-based Btus in the world, even cheaper than spot coal." With coal accounting for roughly half of all US power generation from under 350 gigawatts of nameplate capacity, and gas accounting for just 20%-25% from what was nearly 450 GW of capacity in 2006, the potential for a surge in gas demand from this sector is clearly huge -- although Goldman suggests that many generators may wait until the economics have favored gas for a bit longer before making what can be a...