Record gas use by US utilities fails to drive up price

Natural gas furnace Natural gas furnace

May 7 (Bloomberg) -- U.S. utilities led by Southern Co. are burning a record amount of natural gas for generating electricity without triggering a forecasted boost to the fuel’s price from near 10-year lows.

The power companies used 34 percent more gas in February than a year earlier, Energy Department data show. Even Atlanta- based Southern, historically one of the largest U.S. coal-plant operators, is on pace to consume more of the cleaner-burning fuel than coal in 2012 for the first time in its 100-year history. Utilities are the nation’s biggest gas consumers.

The historic switch to gas is set to peak this year without fulfilling industry predictions that it would eat up inventory and drive up gas prices. That’s because unparalleled output from new shale fields is oversupplying the $95 billion U.S. gas market, postponing relief for hundreds of producers.

Record gas use “may not be the panacea that people think” it will be, Jason Schenker, president of Prestige Economics LLC, based in Austin, Texas, said in a telephone interview. Schenker was the fourth-best predictor of gas prices in the first quarter, according to data compiled by Bloomberg.

The difficulty of forecasting fuel prices led managers of two energy funds to close in the last four weeks, including John Arnold’s Centaurus Energy Master Fund.

While benchmark U.S. gas prices have gained 42 cents, as of 10:53 a.m. in New York, from an intraday low of $1.902 per million British thermal units on April 19, most analysts are not calling the bottom of the price cycle for a fuel that traded above $13 in 2008.

No Bottom Yet

“I’m not expecting a lot of upside through summer” for gas prices, Tim Evans, energy analyst with Citi Futures Perspective, said in a phone interview. “We’re still sitting on a massive inventory of storage.”

Bulging gas stocks are also being sustained by a combination of unusual weather that’s depressing electricity sales, as well as decisions by power company executives to avoid becoming over-reliant on the historically volatile fuel.

Marketed gas production reached a record 66.22 billion cubic feet a day in 2011 and may rise another 4.5 percent this year, according to Energy Department estimates. Inventories rose to 2.576 trillion cubic feet the week ended April 27, 50 percent above the five-year average for the week, the agency reported May 3.

Cheap gas, rather than helping power producers like Southern and Exelon Corp., undercuts their revenue because it drives down wholesale electricity prices, squeezing margins for plants that run on nuclear, renewable and coal power. The utilities, for many reasons, are close to their limit of shifting the mix toward gas.

Elasticity Limits

“You have stretched the rubber band in terms of coal-to- gas switching as much as you can,” Arun Jayaram, an analyst with Credit Suisse in New York, said in an interview.

Meteorologists say the fourth-warmest winter on record that just ended will be followed by a cooler summer for much of the U.S. compared with a year ago. If weather remains mild, total power consumption will be 1.8 percent lower from July through September from a year earlier, the Energy Department said.

Gas consumption averaged 5 billion cubic feet higher at power plants this year through April 10 compared to year-ago levels, Credit Suisse’s Jayaram said. He predicts increases will ultimately slow to an average of 3 billion cubic feet a day this year as generators manage abundant inventories of both coal and natural gas.

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