Swirling and Whirling on Winter Natural Gas Prices
Written by Catherine Elder
My brain is swirling and whirling like a snowflake thinking about winter and prices and where they might go. October is a shoulder month, leading into winter and various sources are publishing their outlooks for price and/or reliability for the upcoming winter, including EIA, FERC, NARUC and the California Energy Commission. Henry Hub prices have come up some in September to rest consistently closer to $2.50 than to $2. The increase in September comes with higher demand: EIA’s weekly update contains a graphic even showing some days in August and September when there’s no gap between supply and demand. That means there is no unused gas on those days that can be stored for winter.
The other thing I see is that the “overhang” of gas in storage has shrunk a little. 3.5 Tcf is plenty of gas in storage for mid-October but is actually ever so slightly less than the minimum of the range we’ve seen on November 1 in the last five years -- and several hundred Bcf lower than the 3.9, almost 4 Tcf maximum often achieved by the start of winter. That few hundred seems hardly a difference worth noticing, except in the context of that supply/demand balance above that shows to have tightened up some. It suggests not a lot of slack.
While Henry Hub prices are up a little, California prices have been up more, nearly an entire dollar per MMBtu in early October. One view is the increase is explained by a compressor station outage up at Eastport, Idaho, combined with a hot spell having driven up demand. But looking at data posted by the two large California gas utilities does not demonstrate demand to have been much more than on an average day. This and the actual limitation on supply imposed by the single compressor engine outage do not seem commensurate with the magnitude of the price increase we’ve observed. Looking more at the posted operating data, it looks like customers are running supply imbalances. This then causes PG&E to use some of the withdrawal capacity it reserves to meet those imbalances. (Negative imbalances are caused when users don’t bring enough gas onto the system to cover their demand – they “take” gas from linepack or utility storage and make up the imbalance later and are more likely to occur when prices are high.) Public postings also show independent storage operators restricted withdrawals due to required safety inspections and maintenance work. So if customers cannot get to their gas out of storage because of maintenance, leading them to run higher imbalances that in turn cause PG&E to use a lot of its inventory capacity to meet, that might be enough to pull prices up. THAT plus the compressor outage being the cause creates a story I can almost believe.
But I digress. Let me share a graphic I started back in March and have updated periodically. Below, we see forward prices for Henry Hub – our continent-wide natural gas market’s benchmark price. You all may want to size this graphic up on your screens to see it better, but it shows 60 months of forward prices collected at four different points in time: late March, late May, early July and early October. It also shows actual average monthly prices for May through September. Notice that actual prices are way different than the forwards, even in near months. But also notice how the seasonal pattern and the magnitude difference from summer to winter is so similar each year. (This is not a new phenomenon, by the way.) Now, notice how forwards have dropped from the prices sourced in late May to the October-sourced prices: the forwards have dropped over the course of the summer. And one more observation: notice how the range of prices widens over time. This denotes greater uncertainty about prices the further we go into the future. So while forward prices have dropped some, they’ve dropped by more in the outer months of the period.
Source: Aspen Environmental Group
So what’s the upshot for winter? To get at that I’ve got a graphic looking back at last winter using some data posted on EIA. (The gaps in the line are weekends and holidays when natural gas markets are closed.) Our current prices are not all that different as approach November 1 than they were a year ago. But look at the impact of that polar vortex incursion that occurred mid-January. We jump from close to $3 per MMBtu to $13.20 per MMBtu.
And that’s what I see for this coming winter: prices will likely remain moderate but for weather. Prolonged colder-than-normal periods will push prices up some. But periods of extreme cold will cause prices to spike. The last update from NOAA reduces the probability of a La Niña to 60% and it will be a weak La Niña. The climate team there also says that “La Niña winters tend towards a stronger polar vortex” yet even so note that the vortex has broken down many times during La Niña winters – and it is that breakdown that allows the cold air incursions. The question to ask yourself is: am I positioned to absorb a price spike of some magnitude for several days, and if not, balance that potential harm against the cost of buying some price insurance.