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Analysis: Record coal stockpiles could squelch U.S. natgas recovery
NEW YORK |
NEW YORK (Reuters) - A mountain of excess U.S. coal supplies may squash this spring's recovery in natural gas prices that came as power plants snatched up the fuel as it plumbed 10-year lows.
Even if gas prices remain cheaper than coal in terms of the energy they generate, as they have since 2010, utilities may be forced to burn more of the dirtier fuel in order to prevent a record rise in coal stockpiles from overflowing.
Analysts say some utilities have been forced to burn more of their excess coal to make room for deliveries that have already been scheduled.
That could reduce an estimated 7 billion cubic feet per day of additional natural gas demand this spring stemming from utilities that have switched off coal-fired plants in order to maximize gas use in power generation. Demand from coal-to-gas switching is up 35 percent from a year ago.
"Coal inventories are at a record high right now, and anecdotally, there definitely have been some forced burns," said Energy Ventures Analysis president Seth Schwartz.
With gas prices up 40 percent in the past five weeks, utilities already have less incentive to reduce their use of coal.
Analysts say coal burns should ramp up this summer anyway because operators will have to run baseload coal units to meet the surge in electric power demand from air conditioning.
But with stockpiles of both fuels at historically high levels after the fourth-mildest winter on record in the United States, any let-up in consumption threatens to amplify pressure on prices.
Coal stocks surged this winter at a record pace, rising by more than 40 million short tons in the six months through March to a record of more than 208 million tons in April, according to government data and estimates. On average over the previous three decades, stockpiles were generally flat in the winter.
Companies are now struggling to control rising coal piles, with many utilities having already deferred or canceled the maximum amount of coal deliveries allowed in their contracts with producers. Now, say analysts, a trend toward "uneconomic" coal burns may be needed to rein them in further.
Even a small loss of gas demand due to forced coal burns -- say 0.5 bcf per day -- would add 90 bcf or more to total supplies, lessening the chance that demand alone will be enough to avoid gas storage congestion that could send natural gas prices to fresh lows before winter.
That would make it much more difficult for gas supply and demand to balance without forcing producers to curb output or driving prices to new lows to attract more demand.
MILD WINTER SPAWNED GLUTS
U.S. natural gas stockpiles hit all-time highs this year due to a lack of heating demand this winter and record production on rising output from shale plays. Prices tumbled this winter, touching $1.90 per million British thermal units five weeks ago, the lowest level since January 2002.
Then strong coal-to-gas switching helped prices rebound to a 3-1/2-month high of $2.76 just last week as weekly gas inventory builds dropped below average levels in six of the last seven weeks. That raised expectations that lagging storage builds would trim record stocks to more manageable levels in the 180 days or so left before winter withdrawals begin.
But gas storage, now at 2.744 tcf -- 750 bcf above last year -- is about two-thirds full and still at record highs for this time. The huge overhang could pressure prices this summer as storage caverns fill to capacity, forcing more gas into the market.
Analysts noted that the gas storage surplus to last year will have to be trimmed by at least another 500 bcf to avoid breaching the government's 4.1 tcf estimate of total capacity. Stocks peaked last year in November at a record 3.852 tcf.
The mild winter also pushed up coal inventories, and power companies are quickly running out of room to store.
The U.S. Energy Information Administration estimated that coal stocks in the electric power sector climbed to nearly 209 million short tons in April and could peak this year at 214 million in May, easily beating the previous record high of 204 million tons in November 2009.
There's no hard data on the capacity to store coal in the United States, but the buildup is already forcing producers to slow output and railroads to renegotiate transport contracts.
"Decade-low natural gas prices have placed enormous pressure on U.S. coal producers which have so far announced cuts of about 80 million tons in 2012 (about 8 percent of total coal production)," Barclays Capital said in a report this week.
Utilities are looking for alternate locations to stockpile coal. Some are struggling to defer or cancel deliveries or sell excess stocks to other buyers, domestic or foreign.
GenOn Energy GEN.N, a wholesale electricity producer with operations in 12 states -- has even declared force majeure because it has too much coal and nowhere to store it.
"I think many (power) plants are maxed out. The electric power sector average days of burn right now is the highest it's been since EIA started keeping track of it," said EIA industry economist Nicholas Paduano, noting the agency's records date back more than three years.
U.S. coal producers have struggled with plummeting prices this year, both for thermal coal used in power plants and metallurgical coal used in steelmaking. Patriot Coal Corp. PCX.N saw stock prices plummet earlier this week on speculation it was looking to restructure.
Analysts say a hot summer could go a long way toward whittling down record fuel supplies.
"If we get a really warm summer, there may not be a need for forced coal burns," EIA's Paduano said.
Seth Schwartz at Energy Ventures Analysis said he does not expect a lot more forced coal burns as summer heat builds, adding: "Utilities have cut way back on coal purchases and are now starting to balance. Their situation is not getting worse."
(This story was corrected in paragraph 9, please read 40 million short tons instead of 40,000 and 208 million tons instead of 208,000.)
(Reporting By Joe Silha; Editing by David Gregorio)
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