One key bullish factor in the natural gas markets is the potential for Liquefied Natural Gas (LNG) exports. Although such exports are not expected until 2015 and beyond, the discount of U.S. natural gas prices compared to much of the world makes eventual exports a real possibility. And consumers, especially large manufacturing and chemical operations, are fearful that exporting our cheap gas abroad could push prices higher, thereby taking away their energy advantage.
One of last summer’s biggest hits was Katy Perry’s ‘Last Friday Night (T.G.I.F.)’. I was one of the many who were guilty of humming along, living vicariously through the lyrics, intermittently shouting TGIF (Thank Goodness It’s Friday)! For the natural gas markets, the real action occurs on Thursdays, the day of the weekly Energy Information Agency (EIA) natural gas inventory report. The result can be volatile prices. Since market volatility is generally not end user-friendly, this is a warning to steer clear of buying natural gas and electricity at this time.
Each Thursday at 10:30 a.m. EST, the EIA releases a report of the quantity of natural gas that was either injected into or withdrawn from natural gas storage facilities across the United States. All storage operators are required to submit their operating data so all market participants learn the results at the same time.
If more gas has been consumed than produced, then the shortfall is taken out of storage, also known as a “withdrawal”. If more gas has been produced than consumed, the excess supply is put into storage, and is known as an “injection”. Withdrawals typically occur from November through March due to heating demand and injections occur from April to October when demand is reduced. Of course, there are other factors that can impact storage activity such as gas demand for power generation due to air conditioning needs in the summer, trends in gas production output, increased gas demand due to coal-to-gas switching in the generation stack due to low gas prices or EPA regulations, etc.
New England is experiencing some of the highest spot electricity and natural gas price spikes in the country with some more than $30 per MMBtu and $200 per MWh! You may not notice if you have a fixed price during the winter, but if you are buying spot gas or power, you are probably aware. If you are soliciting quotes for any term that includes a future winter, hopefully you’ve noticed the impact.
During the past month, a confluence of events has hit this region, conspiring to drive electricity and natural gas markets to three times their three-year average. The chart below shows the recent high prices and volatility. It also shows the Nepool Mass Hub (in blue, left axis, the main trading location for electricity in the New England region) and the Algonquin Citygate (in red, right axis, the main delivery point for natural gas in the Boston area).
Click here for chart: High New England Energy Prices
There are three main reasons that the markets for natural gas and electricity have been so strong in New England recently.
Which will we see first for the Prompt Month Contract of Henry Hub Gas Futures? $3 or $3.60 NYMEX…
We haven’t been outside of this range since December 7 when the January contract closed at $3.68. On the downside, it hasn’t been below the range since September 25th at $2.92 per MMBtu. But many are hoping for a repeat of 2012 when the prompt broke $2 and the 12-month strip was below $2.60.
Have you placed your bets? Well, the chances for a repeat of 2012 appear to be quite slim. Last year boasted the warmest winter of the 20th and 21st centuries! And shale producers kept drilling even as prices plummeted, which led to a huge natural gas storage surplus as inventories were 88% above the previous year. By April, the result was the lowest prices in 10 years!
- We had a hot summer and colder winter than a year ago, albeit still warmer than normal.
- The market has learned about its lower bound. As prices fell in January 2012, producers announced cuts in capital expenditures on new gas production. Drilling shifted from dry gas production to wet gas as well as oil. In addition, we had coal-to-gas switching as gas-fired generation increased to work off the huge storage surplus. The market reacted slowly, but this year suppliers and generators are ready, which will likely prevent prices from falling to the lows of April. Conversely, if prices rise too much we will see producer activity increase quickly and generation will switch right back to coal. The increased supply and reduced demand will increase storage quickly, thereby giving a downward price signal.
The results? I like my chances on $3 to $3.60. Eventually, coal retirements and liquefied natural gas exports should push prices higher, but neither of those will impact the next six months. And shale drilling activity is certainly unpredictable because it is still relatively new.
I’m not a betting man though, so you might have to look elsewhere to make your wager.
Article from Restructuring Today January 14, 2013: NYMEX February natural gas futures moved higher Friday, January 11 in follow-through buying after the bullish storage report a day earlier, analyst Jackson Mueller reported. The front month added 13.4 cents to close at $3.327/MMBTU. Weather pushed gas future higher as forecasts for the next two weeks showed portions of the Northeast with below-average temperatures. That would cut into storage levels that have been well above the five-year average.
My two cents
What drives natural gas prices? Is it as simple as the weather?
Last October and early November, temperatures for the East Coast were COOOOOOLLLLDDD. Out of the last 118 years, November was the 33rd coldest month for the Northeast Region (Pennsylvania to Maine) and even colder for the Southeast (17th coldest). What happened?
Natural gas prices rose from spot prices for the next day to long-term prices for 2015 and beyond. Prompt month* gas rose from $3.57 on November 12 to $3.90 on November 23 when the weather turned. In fact, December was one of the warmest months on record, especially until the cold snap after Christmas. Prompt month gas then fell to $3.31 on December 17.