Gas to Coal fuel switching - Not this year

dan_s · Post by **dan_s** » Mon May 09, 2022 2:08 pm

It is very important for all of us to understand the relationship between natural gas and coal prices.

From Raymond James natural gas price forecast published 5-9-2022

"What about coal switching? We are basically taking it out of our model for 2022-23. Make no mistake, the U.S. natural gas landscape has
improved; however, we were shocked to see prices move above ~$7/MMBtu , and then above $8 more recently. Why? If we were to apply our long thought heuristics of ~1 Bcf/d of demand destruction for each $0.25-0.50MMBtu price change, the movement in inventories relative to our prior
model would suggest there’s been a ~$4 move (across much of the Henry Hub strip) when a ~$2 move would have “done the job.” Clearly, this
heuristic has broken down. Recall, coal regained market share in the U.S. power market in 2021 as natural gas prices moved off of the lows of 2020.
In late 2021 and thus far in 2022, we have actually seen natural gas regain market share despite higher natural gas prices – as coal prices have
jumped even more so than natural gas. We think there are several factors influencing the market, including: 1) U.S. coal producer capital discipline
similar to oil & gas E&Ps (driving up coal prices); 2) continued U.S. coal-fired power plant retirements (making the market less switchable and
flexible over time); and 3) attractive relative positioning of U.S. industrial players that makes them less sensitive to U.S. power costs (international
gas prices are even higher, leading to economic run-cuts internationally, and creating market opportunities for U.S. players in various industries).
In a change vs. our prior model, we no longer have coal taking much share from natural gas in 2022 despite our forecast of high natural gas prices.

MY TAKE: As I have posted here many times over the last few week, without a significant amount of gas to coal fuel switching for power generation this summer, there is NO WAY that natural gas in storage will get back to a safe level before winter begins in November.