In November and December, consultants at Wakefield, MA-based Energy Security Analysis Inc. said they believe average daily spot prices at New York City (Transco Zone 6) will spike to $4.99 and $5.70, respectively. However, by January weaker market fundamentals in the Northeast this winter should chop prices and basis spreads down considerably compared to recent winters.

“Due to the relatively bearish regional weather forecasts, strong storage levels in the Producing Region and Consuming East, growing production alternatives to the Henry Hub, and weaker consumption levels, we warn that the basis bears may not hibernate much longer,” ESAI said in its latest Natural Gas Stockwatch.

The consultants see increased upside volatility in December Nymex prices, which will keep cash high. “While we expect cash prices to begin to taper off in the New Year, basis will actually peak in January due to a weaker Nymex contract relative to Northeast market area fundamentals,” ESAI said. “Part of the fundamental pressure can be explained by the lag between peak seasonal withdrawal levels in the Consuming East and Producing Region.”

Through an assessment of the arbitrage value of Henry Hub, storage dynamics, transportation costs, weather, capacity, and consumption, ESAI forecast that New York (Transco Zone 6) basis would peak at only 85 cents this winter in January compared to extreme highs of $2 last winter, $5.70 in 2000-01 and $3 in 1999-2000. ESAI sees daily spot New York basis averaging 54 cents in November, 70 cents in December, 85 cents in January and 70 cents in February.

“What we are trying to tell folks with this forecast is that this reduction in the volatility of basis is in part a reduction in Nymex volatility but also a response to the weaker fundamentals in the Northeast compared to the fundamentals at the Hub in Louisiana,” said Scott DePasquali, natural gas analyst at ESAI.

He noted that in addition to high storage levels, consumption in the Northeast is expected to be weak this winter due to the slow economy and forecasts for mild weather.

The 25% supply share held by Canadian gas production also is serving to lower the cap on prices. Canada’s share of supply in Northeast has grown 23% since 1997 because of increased takes from TransCanada and the Maritimes and Northeast Pipeline.

A host of new pipeline projects will substantially increase transportation capacity in the Northeast in 2003, putting further downward pressure on basis next year:

ESAI has tallied about 6 Bcf/d of new Northeast firm transportation capacity coming online by the end of 2003. Although none of the mega projects involving new pipelines (Millennium, Independence) has yet come to fruition, the New Jersey/New York City/Long Island area will enjoy significant additions to gas pipeline delivery capacity through an accumulation of revisions and expansions of existing pipelines and storage serving the region, said ESAI.

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