Gas consumers have had a hard time believing it this winter, but the daily spot market has been their friend, said Jon Sorenson, a partner at Competitive Energy LLC, which manages energy purchases for about 20,000 power, gas and oil customers in New England, Atlantic Canada and Texas. Compared to the futures market, cash deals have been the most attractive option, he said.
“When the market was skyrocketing to more than $15 earlier this month, the daily cash market was trailing behind it. That’s been the trend, and we’ve been able to leverage that. But it’s been a scary ride for people,” said Sorenson. “When gas goes to $15 they are like, ‘What the heck are we doing?’ We just say, ‘Patience pays.'”
Sorenson has been recommending daily contracts for all of the fuels this winter, but it’s been a hard pill to swallow because of the credit requirements and historical risk.
“The daily markets have been trailing the futures markets in the winter months so it’s been cheaper,” he said. “For example if we are trading Dracut in New England and that price is $11.85 and with adders of another 50 cents, we are still only at $12.35. Nymex is trading at $11.06 and you add on top of that a basis cost that has gone through the roof.
“If you try to do any short-term basis, the numbers are very high. If I do a one-year product, it’s $2.50, so that’s $13.56 versus $12.35. You are saving basically $1.25 by going to the daily market.”
The best fuel for many larger customers this winter has been oil, and that has led to installation of more dual fuel operations, he said. If a customer can switch to oil it has been well worth the change.
With gas prices falling, that could change back to the traditional gas-to-oil price relationship before the end of the winter, but right now, the inverse is holding, he said.
Through Dec. 15, gas prices year over year were up 115%, while crude oil was only up 42%. “What we’ve had for the first time in quite a while is that the trending that had been going on between crude oil and natural gas has inversed,” noted Sorenson. He said gas prices peaked at about $5/MMBtu higher than crude with gas trading at $16/MMBtu and crude around $60/bbl. The crude equivalent price of gas was more than $110/bbl.
Oil prices have retreated since Dec. 12 to the $56/bbl area while gas has come off substantially to the $11/MMBtu area from a peak of nearly $16/MMBtu. That puts gas back to around $70/bbl at a crude oil equivalent price. As a result, it’s still much cheaper to burn oil than gas.
“Gas futures were down $1.22 [Tuesday] morning to $11.06, off nearly 10%. We predict [January futures] will be in the $10 area [Wednesday] for settlement. that means it will be down $4 since the middle of last week. It’s been very difficult to manage a lot of people’s expectations,” he said.
“We have a couple of hospitals and industrials in the Bangor, ME, area. We made the decision back in early December to burn oil. We hedged 60% of their load in January and February and locked it down and we are going to ride the market for the other 40%. If gas continues to retreat we may lay gas in there over oil [for spot purchases]. It’s a different methodology than we’ve deployed in the past.”
Sorenson said there’s been a lot of concern that customers will not be able to bear the financial burden of energy by the end of this winter. Energy costs used to be 4-5% of total operating expenses but now they are at least 10%, he noted. There has been talk that demand destruction will escalate over the next few months once customers fully realize the economic impact of energy.
“We haven’t lost any customers yet, but there’s been a lot of talking. People have been saying, ‘If this continues, we are going to have to shut down for a month or two weeks or move operations somewhere else.’ There are mills in New England which have noted that the price of electricity is significantly less down south where it’s regulated, in the Carolinas for example.
“The sticker shock is really going to hit everybody in February and March.”
On the positive side, he’s seen a lot of companies look at fuel and process alternatives. Cogeneration has exploded. Dual fuel capabilities are being considered widely. Even biomass is being mulled over.
“In Maine and New Hampshire, we are seeing the biomass option [spring to life]. They are using wood chips. It’s the cheapest fuel right now at $30/ton, which is 300-400% cheaper than gas, but you have transportation costs. If you already are using wood in your processes, obviously it makes a tremendous amount of sense.”
Meanwhile, it was too soon to say whether the crash in natural gas prices Tuesday will encourage ammonia fertilizer manufacturers back into the market. Leading fertilizer producer Terra Industries said effective Jan. 1, it will suspend ammonia production at its Yazoo City, MS, facility because of high natural gas costs. The closure is the second by Terra in the past month. In late November, it suspended all production at its Woodward, OK, facility for the same reason (see related story).
One of the larger U.S. ammonia producers, CF Industries Holdings, has been operating its large Donaldsonville, LA, plant at 50% capacity through the fourth quarter. Stephen R. Wilson, chairman and CEO for CF Industries, told an analysts’ conference in New York earlier this month that orders would have to start flowing in December if there were to be adequate fertilizer inventories in the field for spring planting.
The manufacturers have not been willing to build inventories on spec using $12-$15 natural gas, with the threat their product would be unmarketable if gas prices dropped materially, Wilson said. The high prices could mean less fertilizer would be needed. If farmers see fertilizer prices as too high they are more likely to plant beans rather than corn since beans require less fertilizer and can be planted later than corn.
The nature of the fertilizer business normally is for the industry to work for several months to build up adequate inventories in the field that will be used up within the span of a week or two once planting starts in earnest. But high and highly volatile natural gas prices have undermined that strategy. Management for chemical manufacturers contacted by NGI Tuesday for comment on the impact of plummeting gas prices were out for the week.
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