* US coal stockpiles climb to record highs
* Utilities may be forced to burn coal to trim inventories
* Forced coal burns could slow coal-to-gas switching
By Joe Silha
NEW YORK, May 25 (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 40,000 short tons in the six months through March to a
record of more than 208,000 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.
HEAT RELIEF?
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, 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.
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.”
(Reporting By Joe Silha; Editing by David Gregorio)
