Physical prices on average fell almost 4 cents Thursday as California locations along with the Rockies were especially hard hit. Some Northeast points managed to rise as constraints and curtailments limited flows.
The Energy Information Administration (EIA) reported an increase in storage gas of 26 Bcf, almost precisely what the market was expecting, and prices finished higher. At the close August had risen 3.5 cents to $3.105 and September had gained 3.8 cents to $3.090. September crude oil gained 42 cents to $89.39/bbl.
Traders cited subsidies by the state of California as having distorted western pipeline economics and transportation. "We've seen gas fill up and restraints on gas on CIG that brings gas to Northwest and into Kern River," said a Rocky Mountain marketer.
"We've had a disconnect between CIG prices and Opal," and the trader said there was little incentive to move gas west given current prices. "We're showing Malin at $2.97 and Opal at $2.97, and that's not going to move gas west.
"We have seen over the last few months an attempt to move more CIG gas onto Northwest and Kern at Opal. It's been filling up from CIG west, which has never happened before. CIG had to add another constraint point going west, so we have seen a disconnect between the Opal price and the CIG price."
The marketer attributed the unbalanced economics of moving gas from Opal to Malin to a California program designed to promote the use of biogas.
"A number of end-users in California are paid a hefty premium to buy biogas directly from producers. So what ends up happening is that it is completely backwards, but you have guys paying for transport and moving gas from the Midcontinent out to California when economically it makes no sense whatsoever if you just look at the spreads.
"Because they are incentivized by the state of California it makes economic sense to pay the full transport to get it out there. The end-users have to show transport records and prove they are buying biogas from producers. "I wouldn't say the fix is in, but the economics are hard to evaluate. At a 3-cent differential [from Opal to Malin], nothing should be flowing. It would be cheaper to buy it at Malin.
"It's California, but it's good for the pipelines. The taxpayers of California are going to lose out because there is this big push, but California has a policy to promote biogas. It just makes it harder to evaluate flows on pipes versus economics."
Quotes for delivery at CIG, Opal and Malin all slipped more than a nickel. Gas into Northwest Wyoming Pool shed close to a dime, and at Cheyenne Hub deliveries were off more than a nickel. Kern River was down close to a nickel as well.
Next-day prices at Northeast points rose as pipelines reported numerous constraints. Algonquin Gas Transmission said it was restricting flows sourced upstream of its Southeast compressor station, upstream of it Cromwell Compressor Station, at an interconnect point with Tennessee and at the Beverly meter station.
Quotes at the Algonquin Citygate jumped more than a quarter, and deliveries to Iroquois Waddington surged about a dime. Gas delivered to Tennessee Zone 6 200 L also rose over 25 cents.
California locations weakened. Gas for delivery to PG&E Citygate was down close to a nickel, and deliveries to SoCal Citygate, SoCal Border and El Paso S Mainline all skidded close to a dime.
"The [EIA] number came out right in the range everybody was expecting between 24 Bcf and 28 Bcf, and it really wasn't enough to rally prices. For most of the day we sat between $3.08 and $3.11," said a New York floor trader. "I thought we were going to test up to the $3.25 to$3.35 area, but we might not get there. The market will probably be between $2.85 to $3.05 for the next week or two."
Although futures held firm Thursday, if the calculations of one Midwest analyst are correct, the recent gains in natural gas prices have prompted a switch back to coal for power generation.
August futures dropped nearly 12 cents on Wednesday. "Even with [Wednesday's] decline in natgas prices, the economics of coal-to-natgas switching are still favorable to the coal side. I would expect that some power generation demand has now switched back to coal," said an analyst with the Chicago Mercantile Exchange. "With natgas prices still well over the $3/MMBtu and with the forward curve projecting even higher prices through February of next year, the economics will remain biased to the coal side, and as such, utilities may be gaining confidence to begin the transition of switching back to coal. Coal switching to natgas was one of the main reasons why natgas injections have been underperforming throughout the injection season so far, and thus the narrowing of the surplus in inventory, which peaked earlier in the year." He said a transition back to coal for power generation will make more gas available for injection into storage and push prices down.
Thursday's storage report didn't give traders and analysts much indication that their production and usage assumptions were off track. A Bloomberg survey of market players showed an average estimate of a 26 Bcf injection for the week ended July 20. The folks at United ICAP calculated a 24 Bcf increase, and industry consultant Bentek Energy was looking for a 26 Bcf build. Last year, 48 Bcf was injected, and the five-year average stands at 61 Bcf.
Followers of Market Profile were watching [Thursday's] price action for clues as to the market's next move. Tom Saal, vice president at INTL Hencorp Futures, said August futures were likely to test Wednesday's value area at $3.104 to $3.050 before moving on.
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