Frozen Northeast Getting Gouged by Natural Gas Prices
Bloomberg | January 30, 2014
As temperatures plunge anew into single digits across much of the U.S. Northeast, natural gas prices have been going in the opposite direction. On Jan. 22, thermostats in New York City bottomed out at 7 degrees, a day after the price to deliver natural gas into the city spiked to a record $120 per million British Thermal Units in the spot market on the outskirts of town. That’s about 30 times more expensive than what the equivalent amount of gas cost a hundred miles away in Pennsylvania’s Marcellus Shale, the biggest natural gas field in the U.S. and home to some of the lowest gas prices in the world. And you thought this was the age of cheap energy.
Most of the natural gas that gets used in the U.S. is contracted on a long-term basis and bought with futures and forward contracts, meaning that many consumers in the Northeast won’t feel the full brunt of that price spike. They’re not entirely insulated though. The spot market is there for a reason. Essentially, it’s a refuge for the desperate and unprepared—for those who need to buy or sell immediately. And when a natural gas-fired power plant or a big utility finds itself short, having underestimated the amount of demand it has to fill, its traders and schedulers have to jump into the spot market and pay whatever the going price is. For those buying in parts of the Northeast, it’s been reaching new highs.
“I’ve never seen anything like this,” says John Scarlata, vice president of gas supply at PSEG Power, a subsidiary of the New Jersey-based Public Service Enterprise Group (PEG). PSEG Power started running low on the feedstock it needs to run the handful of natural gas-fired power plants it operates in New Jersey. “For those units, we have been buying some of the higher-cost gas,” says Scarlata. “The prices are just unbelievable.”
That means that on the other side of the trade, lots of money is being made. “Traders with gas to sell are making a killing, and the utilities they’re selling to are getting destroyed,” says Adam Hoffman, a natural gas trader and the managing member of the Mada Group, an energy trading firm in Houston. Hoffman says traders and schedulers who buy for utilities and power plants enter the spot market at a significant disadvantage during times like these because they have to buy, no matter the price. The alternative is to run out of gas, leaving customers unable to heat their homes or turn on the lights.
“Given their obligations, prices absolutely could’ve been higher,” says Hoffman. The sticker shock may have been particularly acute for some traders because natural gas prices have been so low for the last few years. They’re simply not used to trading a product with any sort of volatility. But all it took was for one utility to show what it was willing to pay for prices to take off. “Once one of these guys showed his hand, then the real traders figured it out,” says Hoffman.
At the heart of this trading floor fist fight is a crucial pipeline bottleneck that’s keeping consumers in the Northeast from sharing in the full benefits of cheap, abundant supplies of natural gas just a few hundred miles away. There simply are not enough pipelines connecting supply to demand. And even though the wells in Pennsylvania are practically in the backyard of major cities in the Northeast and mid-Atlantic, pipeline companies are still working to connect the last few miles. Those are the most crucial miles—and explain why, in many cases, it’s cheaper to bring natural gas all the way from Texas or the Gulf Coast to the Northeast.
In November a new pipeline started bringing cheap natural gas from the Marcellus into Manhattan. That hasn’t lowered prices as much as a lot of people anticipated. “Everyone of us who supposedly knows what we’re doing predicted [prices in the Northeast] would crumble,” says PSEG’s Scarlata. They haven’t. Despite an additional year of increased natural gas production in the U.S, the problem has gotten worse. As natural gas production has risen, the share of power generated from it has nearly doubled over the past decade. Yet the capacity to push it into big demand centers remains constrained.
FERC Lifts Price Cap as Cold Grips PJM
RTO Insider | January 30, 2014
The Federal Energy Regulatory Commission granted PJM’s request to lift the $1,000 offer cap as the RTO entered a second consecutive week of frigid temperatures that have strained generators and pushed natural gas prices to new records.
FERC’s order came as PJM issued alerts yesterday warning that resources would be increasingly strained Tuesday and Wednesday. PJM and state regulators also appealed to the public to reduce power use, particularly during today’s evening peak.
Load is projected to approach 140,000 MW tonight, just short of the 141,500 MW winter peak record set Jan. 7.
PJM requested a waiver to lift the cap last week after natural gas prices jumped to triple digits as heating and electrical demand for the fuel surged.
FERC’s order (ER14-1144) effectively lifts the cap on offers beginning Jan. 24 by allowing generators to seek make-whole payments for the difference between their costs and the clearing price.
The commission has not yet ruled on PJM’s separate request to allow generators to offer above the cap for future trading days through March 31, 2014 (ER14-1145). PJM asked FERC to rule by Feb. 10.
Spot prices at Transco Z-5 and Transco Z-6 (non-NY) averaged over $120/mmBtu on Jan. 21 and 22, with prices as high as $140/mmBtu. “These gas prices are record-setting for the PJM Region (if not for the nation), shattering even the records set just earlier this month during the `polar vortex’ extreme cold weather event,” PJM said.
PJM said simple-cycle combustion turbines buying gas at current prices would have marginal costs of about $1,200/MWh. On January 21, PJM said, about 5,000 MWs of generation made day-ahead offers of $999/MWh, indicating their costs were above $1,000. About 4,000 MWs were ordered to operate.
In granting PJM’s waiver request, the commission noted that the Market Monitor reviews all cost-based offers to ensure they are legitimate. The commission ordered the Monitor to submit a report within 30 days of the expiration of the waiver on how much energy was accepted over the bid cap, the cost of that energy and any unverifiable bids that were rejected.
The RTO said it will ask stakeholders to consider changes to the Operating Agreement as a long-term fix for what it called the “unprecedented conflict” between the $1,000 offer cap and the generation must-offer requirement.
“The remarkable conditions present in the `polar vortex’ event less than two weeks ago gave the first clear indication that actual fuel costs could collide with the offer cap, but before PJM could take action to address that concern, this week saw an even greater leap in fuel prices that made this conflict concrete,” PJM said in its filing.
PJM did not ask FERC for relief for generators whose costs may have exceeded the cap before Jan. 24 but said it may make a supplemental filing to seek make-whole payments later.
In a letter to FERC in support of PJM’s request, Calpine Corp. CEO Thad Hill stated, in all capitals: “The stability of the power markets in the PJM region are dependent on the commission’s granting of PJM’s waiver today.”
The waivers will not affect demand response, which is limited to $1,800 ($1,000 plus two times the penalty factor). PJM called on DR several times last week to meet loads as arctic cold followed snow.
PJM’s Chris Pilong told members in a briefing yesterday that unplanned outages from last week’s arctic blast occurred most frequently in the eastern portion of PJM, unlike earlier this month, when outages were more evenly spread across the RTO.
The cold is expected to continue throughout the PJM footprint most of this week.
PJM yesterday issued three alerts for Tuesday: a Voltage Reduction Alert, reporting that estimated operating reserves are less than the synchronized reserve requirement; a Primary Reserve Alert, warning that estimated primary reserves are only 1,000 MWs, half the 2,000 MW objective; and a Maximum Emergency Generation Alert, calling Maximum Emergency Generation into operating capacity.
PJM also issued a Cold Weather Alert for Wednesday.
Cleveland and Columbus, Ohio are expecting lows at or below zero through Wednesday. Below zero lows are also forecast for Chicago.
Lows in Washington, D.C. will be in the teens most of the week.
Natural Gas and Oil Market Update
Natural Gas Futures Pare Losses After EIA Data
MarketWatch | January 30, 2014
Natural-gas futures on Thursday pared some losses after the U.S. Energy Information Administration reported that supplies of natural gas dropped 230 billion cubic feet for the week ended Jan. 24. The drop was within market expectations as analysts surveyed by Platts forecast a decline of between 228 billion cubic feet and 232 billion cubic feet. Total stocks now stand at 2.193 trillion cubic feet, down 637 billion cubic feet from a year ago and 437 billion cubic feet below the five-year average, the government said. March natural gas was at $5.20 per million British thermal units, down 27 cents, or 4.9%. It was trading at $5.13 before the data.
WTI Crude Rises to Four-Week High on Economic Growth
Bloomberg | January 30, 2014
West Texas Intermediate crude rose to the highest level in four weeks after data showed the U.S. economy expanded as Americans’ spending climbed.
Prices advanced as much as 1.3 percent. Gross domestic product of the world’s biggest oil-consuming country grew at a 3.2 percent annualized pace in the fourth quarter, the Commerce Department said. WTI also gained as demand for distillate fuel, which includes heating oil, reached the most in almost six years amid cold weather.
WTI for March delivery gained $1.09, or 1.1 percent, to $98.45 a barrel at 9:31 a.m. on the New York Mercantile Exchange after reaching $98.59, the highest intraday level since Jan. 2. The volume of all futures traded was about 15 percent above the 100-day average.
Brent for March settlement increased 21 cents to $108.06 a barrel on the London-based ICE Futures Europe exchange. Futures were 9.8 percent below the 100-day average. The European benchmark crude was at a premium of $9.61 to WTI, compared with $10.49 yesterday.
EIA - Weekly Natural Gas Storage Report
Working gas in storage was 2,193 Bcf as of Friday, January 24, 2014, according to EIA estimates. This represents a net decline of 230 Bcf from the previous week. Stocks were 637 Bcf less than last year at this time and 437 Bcf below the 5-year average of 2,630 Bcf. In the East Region, stocks were 269 Bcf below the 5-year average following net withdrawals of 124 Bcf. Stocks in the Producing Region were 121 Bcf below the 5-year average of 924 Bcf after a net withdrawal of 84 Bcf. Stocks in the West Region were 47 Bcf below the 5-year average after a net drawdown of 22 Bcf. At 2,193 Bcf, total working gas is below the 5-year historical range.
NYMEX Natural Gas Week-to-Week Price Change
Natural Gas Futures - Five Year Price
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