In concert with a fear-driven rally in the nearby crude oil pit, Nymex natural gas futures catapulted 37 cents higher Monday to $6.231, dragging most of the subservient natural gas cash market with it. Cash prices were up 5-20 cents on average across the board with some of the larger increases in the West where a spring heat wave was driving up demand.
Although nighttime lows across the bulk of the nation were in the 30s and 40s over the weekend and highs were ranging from the mid-50s to mid 70s, temperatures jumped to 100 degrees in Southern California Sunday and Monday. Los Angeles was expected to hit 90 degrees again on Monday, and Bakersfield was seen near 100.
Southern California Border prices gained nearly 20 cents Monday, while points in Northern California points added 5-10 cents. PG&E is expecting lower linepack as the week continues, which could lead to the threat of an operational flow order if substantial demand arises from the heat wave, forcing more gas-fired generation into the supply mix.
The California Independent System Operator (CAISO) was calling for “additional supplemental energy” to be generated in Southern California on Monday. Forecast peak demand was expected to pass 40,000 MW and CAISO ordered maximum conservation efforts as part of a system warning notice, which is just short of a stage one power alert.
The grid operator said there was a lack of available generating capacity and operating reserve south of Path 26. A total of 8,300 MW were offline on Sunday and 8,500 MW were expected to be offline on Monday, including 3,200 MW of unplanned outages. The agency declared a restricted maintenance period from Sunday through 10 p.m. on Monday. “Energy market participants are encouraged to offer additional supplemental energy and ancillary service bids,” CAISO said in its Market Operations Notice.
The capacity shortfall was prompted by “higher-than-anticipated temperatures, loads and constraints on the Southern California Import Transmission (SCIT) System.” CAISO was calling for “additional supplemental energy” to be generated specifically within the SCIT boundary.
By Tuesday, however, temperatures in California are expected to moderate while the weather begins to heat up farther East. “That heat that California is having right now looks like it’s moving eastward into Texas, but the utilities here in Texas didn’t buy as much today,” said a West Texas trader, quoting Waha up a dime to nearly 15 cents and East Texas points up a nickle.
The weakest market Monday was in the Midcontinent/Midwest where prices at some locations, such as Dawn and Chicago, even slipped a few pennies on mild weather. “Chicago is losing a little ground on the balance-of-the-month deals from a basis perspective despite the strength in some other places today,” said a regional marketer. “I think people are looking at $6 and finding it a little hard to swallow.
“I heard people calling for $7 peaks last week but I think a lot of demand will get forced off once we roll into a bidweek at that kind of price. I had a lot markets balking at $5.80s last week during bidweek, but now we are 25 cents higher. I don’t know if the technicals on Nymex will let this come off for a while. The physical market isn’t going to matter in the short-term. Cash is going to follow the screen because it’s a shoulder month. It’s all a storage game and all we are looking at right now are spreads to other months. For the next week or so, the screen is going to be in charge.”
The three-month futures strip (June, July and August) ended the day Monday at $6.302 and the November contract ended the day at $6.500. The winter strip (November-March) currently is $6.626, compared to current Henry Hub cash at around $5.80.
“I can’t make a case for prices to fall much lower,” the Houston-based producer added. “All of the out months right now are above where we ended up with the June contract today. Production is down. Greenspan is concerned. It will be interesting this year to see what happens if we have any significant heat in the Midwest and Northeast. California is already heating up. We haven’t hit 90 yet in Houston, but it could get there soon. There’s plenty of power generation everywhere, but is there enough gas for power and storage?”
Lehman Brothers analyst Thomas R. Driscoll said he expects a storage injection of 80 Bcf in this week’s EIA storage report for the week ended May 30. That would compare to 82 Bcf reported during the same week last year and 78 Bcf reported last week for the week ending April 23.
Driscoll noted that last week’s weather was 21% warmer than the 30-year normal and 6% warmer than last year. “We estimate warmer weather (52 heating degree days versus 55 HDDs last year) reduced heating demand by about 5 Bcf versus last year,” Driscoll said. “If our storage estimate is correct, the storage surplus versus a year ago will decrease from 401 Bcf to 399 Bcf and the storage variance versus five-year averages would decrease from a 34 Bcf deficit to a 19 Bcf deficit.”
The Houston-based producer said he believes more utilities are ramping up injections now that April is over. “They really start to get going in May so I bet we see the injection numbers rising.
“Market liquidity also is still pretty tight and that has played a role in these high prices,” he added. “Total volume still seems light in the cash market which is why everyone is relying so heavily on the Nymex for guidance.”
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