The unusual natural gas prices and basis spreads this summer — with a spike in New York and a crash in the Rockies — may be confusing, but they are consistent with North America’s integrated market and only reflect a “rational” market response to regional circumstances rather than any underlying manipulation by market players, according to the latest report by Energy and Environmental Analysis Inc. (EEA).

While weather continues to be the “major driver of uncertainty” impacting New York markets this summer, pipeline constraints also have played a role in the “dramatic” increases in basis spreads in the Rockies, said analysts. Among other things, EEA said pipeline constraints have resulted from three types of factors: growth in supply deliverability without a corresponding increase in capacity (as seen in the Rockies); growth in demand without an increase in pipeline capacity; or derating of pipeline capacity for maintenance and other factors.

EEA analysts noted that they had not seen the current “price behavior” for at least a couple of years, which they view as the “expected result of the much hotter than normal weather coupled with a lack of growth in pipeline capacity. As long as natural gas is used to meet incremental power generation load, we expect to see substantial swings in summer gas demand for power generation.” EEA said there have been “substantial swings in gas prices in several markets” besides New York and the Rockies, including Florida, where prices have spiked, and Alberta, where prices “cratered.”

Pipe capacity in New York City remains “on the edge,” according to EEA (also see related story). Any activity that pushes up demand in the Big Apple, results in price spikes. The “traditional [New York] City winter price spike during normal or colder than normal winters is now matched by a corresponding summer peak during much hotter than normal summers.”

EEA also expects both winter and summer demand peaks to increase over time in New York City, which will lead to higher gas prices “unless pipeline capacity expansions are allowed to keep pace with or exceed demand growth.”

In the United States, hot weather over much of the country in July and August has led to a “very tight” supply and demand balance, said EEA. “This is despite a relatively large stock of working gas in storage that is becoming a limiting factor on storage injections, and should curb demand for storage refill for the rest of the injection season.”

However, extra stored gas will be necessary to meet demand this winter because wellhead deliverability will be down. “Even though storage withdrawals are expected to average 6.5 Bcf/d more this winter than last winter, this will not be sufficient to meet demand without substantial price increases unless the rebound in drilling activity is able to increase deliverability by almost 1 Bcf/d above current levels,” EEA predicted.

Even though the drilling rebound to date has been slower than EEA analysts expected, “we believe that current and expected oil and gas prices should encourage a vibrant increase.” Analysts expect rig counts to return to about 950 in the fourth quarter. For more information on EEA, visit the web site at www.eea-inc.com.

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