FERC staff said late last week that the natural gas price landscape heading into winter is looking more favorable for consumers than it has for a number of years due to full storage, plentiful supply and new gas transmission infrastructure. However, the staff, in its "Winter 2009/2010 Energy Market Assessment," informed the Commission that winter temperatures -- as always -- remain the "wild card."
The Federal Energy Regulatory Commission (FERC) staff noted that summer gas and power prices in many parts of the country fell to the lowest levels since 2001, adding that the spot price of gas at Henry Hub hit eight-year lows closing at $1.83/MMBtu on Sept. 4. "Since then, prices have moved upward in the last two months, as technical factors and the influence of passive investment in financial markets put upward pressure on physical and financial gas prices," staff told commissioners during FERC's regular Thursday meeting. "Nonetheless, gas prices are still the lowest we've seen in recent years."
It was a case of "all parts of the supply chain acting in concert to produce a success story just when we're desperately looking for good news," Commissioner Marc Spitzer said.
Staff noted that a number of separate events or nonevents have come together to create the rosy picture for gas consumers this winter. "The robust outlook for production, the lack of hurricane-related supply disruptions during the summer, competitive prices for LNG on the global market, storage crammed to capacity and new pipeline capacity all contribute to an outlook for moderate gas prices to consumers this winter," a staff member said. "At the end of October, I could have purchased a fixed-price supply of gas for the winter for $5.12 at Henry Hub. Last year the same supply would have cost $7.15. Unlike the spot price of gas, the winter price has remained steady most of the year."
In spite of the low gas prices, staff noted that gas production remains strong, adding that production was running ahead of last year's rates during the first half of 2009. While production appears to have plateaued, it has not declined as many analysts expected at the beginning of the year. The fall-off in drilling has resulted in production declines in expensive low yield conventional gas reservoirs, but this has been offset by accelerated drilling for high yield shale gas and increased well productivity. With production still outpacing demand, gas has entered underground storage at a record rate, staff said.
"At the traditional close of the injection season, Oct. 31, there was 3,788 Bcf of gas in storage, 7% more than any time in the past," staff told the Commission. "New storage capacity, 186 Bcf, has been opened over the past two years. But, even with this new capacity, U.S. storage fields are 98% full. Storage is so full that pipelines have imposed limits on the amount of gas that can be injected into storage and in some instances have asked interruptible capacity holders to make withdrawals."
New pipeline capacity in a number of markets should also keep a cap on prices this winter, the report showed. Staff cited 3.8 Bcf/d of new northeastern pipeline capacity and LNG supply that would help lower basis and price volatility this winter. About 1.8 Bcf/d of the new gas service is attributable to the extension of the Rockies Express Pipeline (REX), which began service to Clarington, OH, this month (see NGI, Nov. 9). Staff found that the price difference between the Rockies and Appalachia has declined from as much as $1.80/MMBtu before REX-East entered service to 30-35 cents in August. The report showed that prices will converge even more once the new line is running for a while. "Eastern and western U.S. gas markets are becoming coupled," staff said.
Questioned by the commissioners about pipeline capacity to transport gas from the expanding development in Appalachia's Marcellus shale, staff noted that proposals for some new lines already had been filed to carry both the Marcellus and REX gas to major East Coast population centers. Further, there's a "potential tsunami" of applications in the wings for new pipe capacity.
Despite all of the bearish talk, staff was quick to warn the Commission that prices could spike once cold weather arrives. However, it noted that the spikes are likely to be "less severe" than they otherwise would have been. The report added that no matter what happens, gas that was purchased by local distribution companies for this winter was bought at spring and summer prices, which can't be changed. Staff estimates the price, on average, of gas put into storage this year was around $3.45/MMBtu, compared to $9.84/MMBtu last year.
The National Oceanic and Atmospheric Administration's (NOAA) outlook for the 2009-2010 winter is for below average temperatures in the Mid-Atlantic and Southeast, with an equal chance of temperatures being colder or warmer than usual in the Northeast, Ohio Valley and California. Warmer than normal temperatures are expected for the West -- outside of California. However, staff noted that other weather forecasts are predicting much colder than normal temperatures and snowy conditions after the new year for the eastern seaboard.
Staff also pointed out that weaker winter natural gas prices will likely equate to weaker power prices. "Forward winter electric prices range from 7% to 24% lower than winter forward prices at this time last year," staff said in the report. "These declines mostly follow forward natural gas prices."
Another contributing factor, according to the report, is the likely expectations for electricity consumption. According to data from the Energy Information Administration (EIA), for the first six months of the year, electricity sales to retail customers were down 5% from the previous year. In the Midwest, where the price decrease is the greatest, the Midwest Independent Transmission System Operator's market monitor has also identified the increased availability of wind power as a key factor for the decline.
Traditionally, winter electricity prices are higher in the Northeast due to high gas prices and cheaper in the West due to less expensive gas prices, but staff noted that new pipe infrastructure is changing what is normal. "This year the REX pipeline has resulted in a significant improvement in gas prices in the Rockies relative to the rest of the country. Also, the price of gas from western Canada has moved upward due to declining gas production and the declining dollar. These relatively higher western gas prices are reflected in the gas forwards for January and February."
Staff added that natural gas is not the only energy source with record high inventories. The report found that U.S. power sector coal stockpiles have also broken all records, with 198 million tons, or 73 days, of stocks available.
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