As part of a report on a return to widespread coal-to-gas switching (C2G) in the US power generation scene, the investment bank upgraded its forecast for 2014 gas production in the country by 0.8 billion cubic feet of gas per day.
In making this adjustment it noted there was impressive gas output growth out of the Marcellus and Utica shale regions in particular.
“A return to C2G would soften the US coal outlook, as prices incentivise power generators to burn gas ahead of coal,” Goldman said.
“In our view, the combined impact of C2G and coal-fired retirements is consistent with a 4% year-on-year fall in US coal demand and rising inventories in 2015. In this environment, we believe Central Appalachian (CAPP) coal is particularly vulnerable to renewed competition from gas, given its relatively high costs and proximity to northeast shale plays.”
The investment bank has also developed a new “coal-gas joint pricing model” to price-in the correlation between the two energy commodities.
“In our view, strong US gas production growth will now drive a bearish trend in both US coal and gas prices to end-2015,” the bank said.
“Accordingly, we lower our fourth quarter 2014 and 2015 average US natural gas forecasts to $US4 per million British thermal units from $4.25/mmBtu.
“In collaboration with our equity colleagues, we downgrade our fourth quarter 2014 and 2015 average CAPP coal forecasts to $61/tonne and $60/tonne, respectively.”
The bank also emphasised that risks were “skewed to the downside” plus took account of the price competiveness of thermal coal from nation’s Powder River Basin region.
“In particular, we see a 25% risk of gas prices needing to fall to $3/mmBtu to encourage PRB switching in the shoulder months of 2015 [May and June], should the weather turn out to be milder than normal.”
