With high storage levels for all the winter heating fuels and forecasts of warmer than normal temperatures, FERC staff is predicting a relatively good winter ahead for energy consumers and sees no red flags on the horizon for market participants.
Although a winter cold snap certainly could lead to price spikes, the current winter weather outlook from the National Oceanic and Atmospheric Administration (NOAA) shows no areas of below normal temperatures in the Lower 48 states and above normal temperatures for the majority of the country, staff noted in a presentation Thursday at a regular Commission meeting.
Meanwhile, working gas levels in storage as of Oct. 13 were at 3,442 Bcf, just shy of the all-time record of 3,472 Bcf posted at the end of November 1990. In its October 2006 Short-Term Energy Outlook, the EIA predicts that end-of-October levels will reach 3,538 Bcf. FERC staff said it also is expecting a new record high for storage this year.
“The prospects for this winter look as good as they have for some time,” said Steve Harvey, director of FERC’s Office of Energy Market Oversight. “Current [natural gas] spot prices are relatively low, certainly at their lowest levels since last year’s hurricanes.
“The current conditions for natural gas indicate that the system has significant flexibility to deal with most challenges that might arise throughout the winter,” Harvey added.
The recent drop in winter natural gas prices may have finished off hedge fund Amaranth Advisors, but it certainly hasn’t diminished futures market interest, said Harvey. “Despite Amaranth’s loss and subsequent sale of its natural gas positions, activity in the futures markets related to this time period [winter 2006-2007] have remained fairly stable at record levels, not decreased. To some degree that level of interest may be seasonal; still despite a spectacular failure of an active participant in financial natural gas markets, winter positions remain significant.”
Harvey noted that Henry Hub prices fell to $3.60/MMBtu earlier this month. “That brief drop brought prices to their lowest level in four years. As of the middle of this week prices have risen back to above $6/MMBtu, this morning around $6.70. This week’s rise is due to several factors, including stronger than normal demand due to early cool weather in the Midwest, continued incentives for storage injection and fuel switching… Most likely over the next few weeks prices will remain volatile but still low.”
He said despite concerns that high storage levels would prompt more production shut-ins by producers, FERC staff has found “no large-scale evidence” that producers are shutting in. He noted that production is “hard to track” but said that there has been no indication of “large, organized production shut-ins.”
The fuel switching that has occurred has been particularly pronounced in New York and Florida, he said. Harvey noted that since March of this year, natural gas prices have been not only below heating oil but also mostly below low sulfur residual oil prices, which is unusual. This has prompted dual-fuel operators to burn gas rather than resid. “This is the longest sustained period of lower gas than resid prices than we’ve seen in many years,” said Harvey. “Currently spot markets do not indicate that market participants believe that this relationship will last into the winter and indicate higher gas prices relative to oil.
“Weather is likely to be the most important determinant in this relationship. Any sustained increase in spot gas prices at this point would likely be due to weather.”
Harvey noted that the NOAA weather forecast shows a very mild winter, but more recent forecasts seem to indicate closer to seasonal weather. “One forecaster even released an assessment of a colder than normal winter, though others did not follow,” he noted. “No one currently expects the winter to be as warm as last year.”
Harvey also added that recent declines in wholesale gas prices will not be completely reflected in many winter retail bills because gas put in storage to serve winter peak demand was purchased at higher price levels. Some winter gas also flows under long-term contracts that were priced in different time periods.
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