The Iceman Cometh Again: Winter Isn’t Over for US Natural Gas Markets
After the wallop of the polar vortex earlier this month that sent US gas demand and US Northeast gas prices soaring to all-time highs, one would think that the worst is over, no?
That would be a negative.
As the Platts natural gas team has repeatedly pointed out in market commentaries, analysis stories and a recent webinar, winter is only halfway done.
Still, even as the polar vortex yanked temperatures far below freezing in many parts of the country, market players were shedding length in the NYMEX gas futures market, believing that they had seen the worst of the heating season
But as of Monday, January 13, weather models were coming into greater convergence and by midday Monday, those who were calling for an extreme cold event at the end of January, were upping the ante: the word “Snowmageddon” was being bandied about.
Result: futures rose sharply that day in anticipation of that extreme cold and on the back of expectations of a possible record draw from gas storage stocks to reported by the Energy Information Administration on Thursday, January 16, (courtesy of said early-January polar vortex).
Karl Marx was famously quoted as saying: “History repeats itself; first as tragedy, second as farce.”
The question we ask as market reporters: Should Snowmageddon hit, will history repeat itself?
As it stands, the answer is: unlikely.
Preceding the record high gas demand and prices during the polar vortex was an early start to winter, eight major winter storms resulting in multi-year high prices. In short: the market was already inflated prior to being whacked with the polar vortex.
What we have now is a period of relatively lax demand and waning prices.
But that’s not to say that are extremely important takeaways from the polar vortex that ought to be kept in mind before the end-of-the-month cold.
Lesson 1: Firm transport
- What we gleaned from several market players was that they opted to roll the dice. Instead of paying for firm pipeline transportation, which is admittedly the most expensive, they went for cheaper options, such as secondary and interruptible transport. These were the first transportation options to be restricted by several pipelines during the high-demand period, forcing players who had to serve their customers no matter what to hit the spot markets, thereby sending prices into the $70/MMBtu range.
Lesson 2: Baseload
- January monthly prices were as much as $17.60/MMBtu cheaper than the average spot price during the time of the polar vortex and the days following it, meaning players who didn’t buy baseload were caught very, very short. Anecdotally, we’ve heard of traders worried for their jobs after those few days of extreme weather and extreme prices pretty much wiped them out.
Lesson 3: More pipeline capacity
- One could argue that the 800,000 Mcf/d Spectra Energy New Jersey-New York pipeline that delivers gas right into Lower Manhattan has helped lower New York City cash basis. Still, we would point out, that market saw record highs and was the third loftiest price in North America on January 6. Interestingly, that pipe wasn’t running full the day of the polar vortex. In fact, it has been running at between 40% and 50% since it came online November 1. We would contend this wasn’t sufficient provide major price relief to New York City because of the under-utilization (which we understand was due to the reluctance to commit to firm transportation). More pipes in the Northeast are on tap through the end of the year. One has to ask the question: Will they really matter?
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