U.S. Gas Prices Plummet 17% in '98, But Canada Holds Its Ground
The gas market actually did pretty well last year considering it
was the warmest year on record, but it may take an ice age to
reduce the surplus storage gas bequeathed to 1999. Spot
delivered-to-pipeline gas prices in the U.S. averaged $2.02/MMBtu
in 1998, down 41 cents, or 17%, from 1997. Some points fared better
than others and the West generally did better than the East. Canada
actually came out ahead.
But prices fell sharply at most major market and supply points
in North America. Henry Hub prices collapsed 49 cents to average
$2.10 for the year. Midcontinent field prices on Panhandle Eastern
dropped 44 cents to average $2.01. New York citygate prices
plummeted 62 cents to $2.43, and Chicago citygate prices tumbled 56
cents to $2.19.
"I've heard last year was the warmest in 700 years. That would
tend to depress prices," quipped Ronald Barone, energy analyst at
PaineWebber. Barone also mentioned other factors, including the
impact on industrial demand of the strike at General Motors and the
losing battle with competing fuel prices because of the depressed
crude oil market.
"Inventories are at the highest levels in 10 years for most of
our commodities, oil, liquids and gas, and it's because of the warm
weather last year and the exceptional storage build we had last
summer. Depending on how this winter goes, it could have a lasting
effect," Dynegy President Stephen Bergstrom warned in an interview
with NGI last week. "In November and December we were 15-20% warmer
than normal so all that does is compound the problem. We need to
have several weeks of sustained cold to get this storage unloaded."
One liquids trader said the other day that we need the ice age, he
The storage overhang and, of course, the warm weather were major
factors depressing Henry Hub-New York City basis in 1998. "The
basis to the Northeast got crushed because of storage. [It]
normally is a little better than what we saw for most of 1998,"
noted Bergstrom. "There wasn't a lot of value for transportation to
the Northeast, but that was more storage- and demand-related than
anything else. We've seen basis in the last week or so in the daily
market has been running back up to 70-80 cents versus not even
covering variable costs of a nickel or so last summer."
Several spot market locations were better able to handle the
heat and the storage situation, however. For example, declines in
the Rockies were not as serious. At Opal, WY, prices fell only 20
cents to $1.81 and basis with the Henry Hub actually tightened by
nearly 30 cents.
"Some people would say it's because of Pony Express [KN Energy's
new pipeline from Wyoming to Kansas City] and the Wyoming
Interstate and Trailblazer expansions [to Midwest-bound pipelines]
that happened two years ago, but I don't agree," said John Harpole
of Mercator Energy in Denver. "I think it's all weather [related].
The West has had hot summers and cold, dry winters."
One other notable change in the West was the significant
widening of San Juan-Southern California basis. While the
difference between Opal and Southern California border prices
actually decreased 9 cents, the difference between San Juan and the
border increased by 17 cents. The obvious reason: Dynegy's control
of 1.3 Bcf/d of capacity on El Paso between the San Juan basin and
the border. Dynegy's two year contract for the capacity started
"Obviously [our contract with El Paso] had an impact and changed
the market dynamics in the West, and that continues because our
contract continues," said Bergstrom. He called it a
"rationalization" of the transportation market out West and said
things would be different if the capacity were in many hands rather
than just one. "It doesn't have near the impact of a storage
overhang on the industry," Bergstrom added.
Canada on the Plus Side
Western Canada appears to have been the only safe haven last
year from the general price depression. Aeco-C prices actually rose
3 cents to US$1.38 while Chicago prices plummeted 56 cents to $2.19
from last year's average of $2.75.
"There's not enough gas in Canada to feed all the export
capacity. We've been expecting that for some time," said Bergstrom.
He said Aeco prices were strong last year in anticipation of
expansions by Northern Border, TransCanada and Portland Natural Gas
Transmission this winter. Together they represent an increase in
Canadian export capacity this winter of about 1.2 Bcf/d.
"Once it gets there, it's too late for a trader to make any
money on the position. When things like that happen, you'll see the
forward market will tell you the answer before the physical market
gets there." Those expansions were factored into western Canadian
prices all year.
The Outlook for '99
What is factored into prices right now is the large storage
surplus, 606 Bcf as of last week when compared with levels last
year at this time. Most observers (see related story) believe that
without severe and prolonged cold over the next few weeks, prices
in 1999 may not fare much better than last year.
What apparently is not factored into prices yet is the huge cut
in E&P spending by the major producers and many of the large
"As a result of all of this, there has been a severely depressed
drilling budget in the last half of 1998 and in 1999. It's
incredible," said Barone. "And for every 100 decline in the rig
count, deliverability declines something like 800 MMcf/d nine
months down the road. So we are going to see the impact on
deliverability in the last half of this year.
"I'm probably crazy. I'm still [forecasting] $2.40/MMBtu" for
delivered prices in 1999. "But I didn't think we were going to end
1998 with this much gas in storage and I thought we were going to
have normal weather conditions in November and December. We only
had normal weather conditions the last two weeks of December. My
$2.40 could be high but I think we could be looking at some pretty
healthy gains. I'm not cutting my $2.40 yet. I think it's still
The 12-month strip of gas futures prices on the New York
Mercantile Exchange fell below $2 last Thursday. It was $1.92 when
the January contract expired Dec. 29.