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Effects of this Winter’s Natural Gas Price Volatility

March 17th, 2014

OMAHA (Capstone Energy Services) – This winter will have lasting effects on the natural gas costs for the rest of this year. Daily spot price volatility, particularly in the eastern two-thirds of the country has been record setting and, at times, reverberated into all areas of the country, even regions not experiencing extreme cold weather and exceptionally high demand. Very high natural gas requirements for both heating load and power generation accelerated storage withdrawals by utilities and marketers well beyond all expectations. As storage was depleted, the spot market became overwhelmed by utilities and marketers seeking incremental supplies, thereby pushing daily prices through the roof. Production from the Marcellus and Bakken Shale was not a benefit because of limited takeaway pipeline capacity and the populated areas of the Northeast were plagued with insufficient delivery capacity. Making matters worse, a Canadian pipeline serving the upper Midwest was put out of service because of an explosion while other Midwest pipelines suffered reduced deliverability due to operational problems.

As spring approaches, both the NYMEX and daily spot prices are beginning to return closer to pre-winter levels, but there will certainly be some lasting effects of this winters record setting price volatility. The most obvious will be storage. Most analysts agree that storage will end March below 1,000 Bcf, with some suggesting a drop to near 800 Bcf. Total withdrawals this winter season will likely be close to 3,000 Bcf, 500 Bcf more than the 2003 previous high. As a result, replenishing inventories this summer will require injections 500 Bcf higher than the previous high. It will probably take moderate summer weather and continued increases in marketed gas production to meet that objective. Concerns over storage inventories will likely keep prices up into the summer until some of the shortfall concerns are alleviated. A hot summer will likely push prices much higher again.

In many instances, the effect of the incremental costs incurred by utilities and electric generators has yet to be felt by consumers. Many gas utilities defer these incremental costs and subsequently incorporate them into a periodic “gas cost adjustments” (GCA) or “purchased gas adjustments” (PGA). Many of these increased costs will not take effect until later in the year. Electric utilities use a similar mechanism in pricing retail electricity, the “fuel cost adjustments” (FCA) which will also hit consumers later this year to the extent the electric utility required gas fired peak generation or had to purchase spot electricity during these peak pricing periods. Already, the debate is beginning before regulatory forums as to who should absorb the costs. Generators in CA have filed a request with the Federal Energy Regulatory Commission to allow them to pass through these unusual costs, a request the California Independent System Operator vehemently opposes. The regulatory debate is just beginning.

End Users should watch the market closely. The ongoing storage shortfall will create higher levels of price volatility. There remains an increased risk of higher prices for the balance of this year and the potential for much higher prices this next winter if storage injections fall short of expectations this summer. A re-evaluation of pricing and hedging strategies probably makes sense. In addition, it will be worthwhile for facilities using utility supplies for gas and electricity, which might qualify to use third party suppliers, to re-assess that option once the markets finally settle down.

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By Ed Freeman

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Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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