We continue to believe that the risk of higher pricing for both natural gas and electric supply outweighs any pricing downturn opportunities. We are currently experiencing a buying opportunity, clients should seriously consider covering their winter electric and natural gas exposure if they have not done so already. If all goes well with temperatures, natural gas injections and the hurricane season, we could see buying opportunities last through October. Clients should consider longer positions in the market compared to shorter 12- or 18-month deals. We are seeing competitive pricing for 24- and even 36- month terms due to the lower capacity charges.
Natural Gas Storage
It’s Autumn, and shoulder season has arrived. But higher than normal temperatures have remained throughout the country. Last week temperatures in Chicagoland reached as high as 85 degrees, in October!! But no complaints here considering that the days are getting shorter, the nights are getting longer and the temperatures will soon follow their natural downward path. On September 30, the Energy Information Administration (EIA) reported a natural gas storage injection of 101 Bcf; a figure above the analysts’ expectations yet pricing was not affected much. Natural gas in storage is currently at 3.487 Tcf, 49 Bcf above the five-year average figure and only 155 Bcf below last year’s record setting levels.
Natural Gas Storage: Storage Buildup
Continues on Strong Pace During September
Natural gas storage inventories are still lower than last year’s levels, but the variance continues to shrink at a faster pace. Injections over the last couple of weeks have surpassed expert forecasts. Today’s injection report of 101 Bcf for the week ending 9-27-2013 was much higher than last year’s injection of only 77 Bcf. The traditional storage injection season runs through October 31st so we have at least four more storage injections forecasted to continue strong; expectations still stand for the natural gas market to possibly loosen up a little more before the onset of the heating season.
Weather forecasts for October and November are indicating that the majority of the country will experience normal to above normal temperature patterns. We have also learned that the scheduled nuclear plant maintenance shut downs for this fall are substantially lower than the rolling average. These two factors could potentially help the market by reducing natural gas usage for both electric generation and heating loads allowing natural gas storage inventories to build to near or above record levels before winter temperatures set in. Last week we had our first Tropical Storm, named “Karen”, which luckily did not become a hurricane before hitting the natural gas producing area of the Gulf. We are not done yet with the Hurricane season.
Natural Gas Production and Pricing
Our national dry natural gas production continues to exceed last year’s levels; we are currently at 2.5% above last year. It appears that the magic price for the coal to natural gas switch is the $4 per MMBtu mark; sustained pricing above the mark means that power plants will continue to burn coal while sustained pricing below that mark is a good incentive for generators to fire up their natural gas units. Currently coal prices are at their lowest point over the last three years so the incentive for electric generators to switch to an alternate fuel such as natural gas has diminished.
There have been several articles and reports stating that tight natural gas supply balance in the Northeast and especially in the New England area are driving forward-basis pricing much higher than the rest of the country. Winter forward prices at the Algonquin Gas Transmission city-gates, a highly constrained and often volatile New England hub, are averaging $8 per MMBtu year to date, a 31% increase compared to last winter. Even without any clear forecast for the upcoming winter’s temperatures the pricing for basis (capacity coverage) is heading higher and higher every day. Last November spot prices at Algonquin city-gates jumped by $4.10 per MMBtu within a week’s period. This year it could get even more volatile.
On Friday, September 27th the October 2013 natural gas contract settled at a price of $3.498 per MMBtu, a slight improvement over the September settle. The NYMEX Natural Gas price settle curve depicted below includes a polynomial trend line (red line) which shows a sustained upward pricing curve. Despite the above forecast storage inventory reports over the last couple of weeks, the NYMEX forward natural gas futures contracts have not reacted with substantial pricing downtrends. It appears that natural gas pricing is bouncing off a bottom threshold. Any pricing downtrend will be small and brief but an uptrend could be large and much longer.
Currently the 12-month average forward pricing curve for natural gas is at $3.789 per MMBTU, compared to last month’s $3.873 per MMBTU price. In addition the five month pricing curve for the upcoming heating season, November 2013 through March 2014, receded a little to $3.77 from last month’s $3.885 per MMBTU. For all practical purposes, the heating season is around the corner. As stated last month the market appears to be bouncing off a bottom threshold and several buyers have taken advantage of the recent lower pricing in order to cover their positions for the upcoming winter loads. Several energy executives project that the natural gas market will continue to fluctuate in the $3.5 to $4 per MMBTU range for the rest of the year.
The fact remains that natural gas and electric prices continue to trade higher than a year ago, but they are still close to the lowest levels of the last ten years set back in May of 2012. The recent development of shale gas production has provided some protection against extreme pricing spikes usually accompanying the hurricane season, but a large region of our country, the Northeast, inclusive of the NYC area and New England, has remained very volatile due to high dependence on natural gas for electric generation and capacity constraints. A coastal storm such as Sandy or a sustained winter storm with snow accumulation and Arctic temperatures could create major disruptions and substantial price spikes particularly for these markets.
We continue to believe that the risk of higher pricing for both natural gas and electric supply outweighs any pricing downturn opportunities. Clients should seriously consider covering their winter electric and natural gas exposure if they have not done so already. If all goes well with temperatures, natural gas injections and the hurricane season, we could see buying opportunities last through October. Clients should consider longer positions in the market compared to shorter 12- or 18-month deals. We are seeing competitive pricing for 24- and even 36- month terms due to the lower capacity charges.