With the heat expected to continue boosting power generation demand through the weekend and futures showing no signs of weakness, the week-long cash market rally pressed on Friday although it lost some steam at some locations in the Northeast, particularly Iroquois Zone 2, which had been one of the hottest points over the course of the week. Iroquois prices were flat in the mid $7.60s, but Dracut and Tennessee Zone 6 added more than 30 cents.
Near-month gas futures added 21.8 cents, closing at $6.347 largely in response to another record setting day in the crude oil futures market. August crude ended at an all-time record of $77.03 primarily because of conflicts in Nigeria and the Middle East. The futures market strength combined with the summer heat to sustain the cash market rally.
“Northeast basis was off a little bit today from Thursday, but it was strong for a weekend,” said a regional marketer. “New York was trading about $1.10 basis. Central New Jersey will be at 99 degrees for a high on Monday so you have balancing issues affecting the way three-day gas traded for the weekend. If you want gas for Monday, you have Saturday and Sunday to consider as well. I think that helped hold basis up more so than it would normally. It’s getting hotter each day through next Wednesday in the Northeast. It should start to cool off after that.”
Although Iroquois prices were basically flat Friday in contrast to the 72-cent jump higher on Thursday, Zone 2 remained the premium market location in the U.S. “There are some generation load pockets that you can’t get to any other way but Iroquois,” the marketer said. “And on top of that, I think there are some credit constraints. Some of the big buyers there aren’t exactly high creditworthy counterparties so they have to pay a premium to get their gas. They can only buy from a few people, and that tends to drive up the price as well. It’s also not a real big pipe like Transco or Tennessee, especially when you get in the Zone 2 area. When the generators come in and buy spot, they can push the price up pretty quickly.”
Most Gulf Coast points rose more than 30 cents Friday, with the Henry Hub averaging in the high $6.20s and Transco Station 65 averaging near $6.60. The Midcontinent also remained hot with prices rising by 20-35 cents. And in contrast to Thursday, the Western market joined the rally, posting gains of 15-35 cents with PG&E Citygate and Malin leading the charge.
“The buyers keep on buying. I was surprised to see how much demand there was out there,” said a Rockies producer. “The West played a little catch-up today in response to what happened on Nymex Thursday and because of the California power situation.”
California’s power grid could post a new electricity demand record by Monday as air conditioners across the state battle a powerful heat wave, the California Independent System Operator said. The grid operator called on Californians to conserve electricity by declaring a “power watch” from Friday to Monday. Temperatures in inland areas are expected to exceed 100 degrees. Weather experts said the coming warm air mass Friday through Monday will be even hotter than first predicted.
The highest demand is expected Monday when the highest temperatures are forecast in the current heat wave over most of the West. Friday’s demand was expected to reach 46,300 MW about 4 p.m. PDT, which would break the record of 45,431 MW set July 20, 2005, the Cal ISO said. Monday’s peak is expected to be 46,500 MW.
Malin and PG&E Citygate were up nearly 40 cents Friday. And spreads were still working even to Southern California, which usually gets challenged over the weekend.
“There was a lot of physical demand because of the heat, but industrial loads also have been a little bit higher,” the Rockies producer said. “We have seen some industrials who had been on the fence start to hedge a little bit more actively as prices came up. When they saw the increases continue every day this week, they got scared and started locking in prices. That might have actually served to add to this run.
“But I don’t see how this can be sustained,” he added. “The only thing that remains a big question is the hurricane season. Without a storm, this is going to have to come back down. If it doesn’t happen in the next month, it has to come back in September.”
The National Hurricane Center reported quiet conditions in the Atlantic, Caribbean and Gulf of Mexico on Friday with no signs of tropical storm formation on the horizon. June was the mildest June on record for global tropical storm activity. By this time last year, four named storms had already formed in the Atlantic Basin with three entering the Gulf of Mexico. So far this season there has been only one named storm, Alberto, which approached the Gulf of Mexico but never reached hurricane status and never posed any real threat to production facilities.
While the hurricane season has been a nonevent so far, temperatures have jumped into the market driver’s seat. The National Oceanic and Atmospheric Administration said Friday that average temperatures for the continental United States from January through June (51.8 degrees F.) led to the warmest first half of any year since records began in 1895.
Last month was the second warmest June on record. In the West 11 states were much warmer than average and only five states nationwide (Kentucky, Ohio, Pennsylvania, West Virginia and Southern Carolina) were cooler than normal during June. July also appears to be shaping up to be a very hot month. The latest six- to 10-day forecast shows above normal temperatures over nearly the entire Lower 48 plus Alaska. No below normal temperatures are predicted and the only areas expected to see normal temperatures are South Texas, which is pretty hot normally this time of year, and the Southeast, which also is usually pretty toasty in July.
Temperatures were much above normal in California, the Southwest and the Midcontinent and Midwest on Friday. There were some below normal readings in the Pacific Northwest, but Sumas and Kingsgate prices still move up more than 20 cents.
However, gas flow volumes through Sumas have been running pretty low this month because of Jackson Prairie storage levels being so high. Northwest Pipeline is not accepting requests for interruptible storage injections at its Jackson Prairie Storage facility and required interruptible storage customers last week to bring their balances to zero by July 14. That put some downward pressure on Northwest prices, but it may have been largely offset by gas flow constraints on Westcoast in British Columbia.
“People just haven’t had as much of a need to buy Sumas this month,” said a Canadian producer. “Plus the East has been running so strong that it has been pulling AECO and Station 2 up with it, challenging the transportation spread to the Pacific Northwest. The other factor has been the changed transportation structure on Westcoast, which is trying to force interruptible shippers to buy firm transport by giving FT customers authorized overrun service. In addition to that, there was the Pine River station outage caused by a lightening strike, which cut flows for about a week, and maintenance at Fort Nelson, which limited flows until July 12.” Bentek Energy reported that gas flows through Sumas month to date are down 39%, or 329 MMcf/d, compared to flows during the same month in 2005.
High storage levels have limited gas flows at a number of other locations this month. MichCon flows are way down. Niagara has been down slightly. “Quite honestly we are not in the market because our storage is already flush like everyone else,” said a Northeast LDC. “We don’t want to get everything in there by the end of July, right. There still is some to fill. We hope that in September there will still be some space left to be filled.”
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