LuthINformed- Issue 6, Natural Gas Storage

Published to LuthINformed, Issue 6 (July 6, 2016)

In this issue, we offer a look at natural gas storage and its correlation to prices. We hope to provide our readers with guidance and actionable information that will be both valuable and useful. As always, your feedback is welcome…


The Impact of Storage on Natural Gas Prices…

As we’ve discussed in previous newsletters, weather, economic growth and other factors all impact natural gas price trends. However, short-term prices often react most quickly to the EIA Storage Report announced each Thursday at 10:30am. There are three primary supply-side factors that affect natural gas prices:

  • Variations in the amount of natural gas being produced
  • The volume of natural gas being imported and exported
  • The amount of gas in storage facilities

Price volatility often peaks when the EIA announces unexpected storage levels versus the five-year average level. That is to say, the rate at which storage levels move away from prior levels plays a role in creating periods of high volatility. Of course, weather extremes dramatically impact storage. Our last issue on the 2014 Polar Vortex made this relationship very clear. However, storage operators have the ability to vary their rate of injections during the summer to address imbalances – and to maximize their financial positions. They typically inject at a slower pace in order to meet summer cooling demand, but they must also inject to sufficiently meet next winter’s heating demand.

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Storage vs. NYMEX Settlement…

A commonly asked question is whether storage levels are correlated to NYMEX prices. The chart above illustrates the inverse correlation between natural gas storage levels and historical NYMEX settlement prices over the past three and a half years. During the polar vortex of 2014, storage levels fell to their lowest while prices reached highs. Last winter (2015-2016) was one of the warmest on record – storage levels peaked and prices have fallen. Over the past few months, volatility has lessened and is similar to that seen during the spring of 2012 – the last time inventories were near current storage highs. Add to this picture a general winter warming trend as the chart below demonstrates. This, in addition to recent high production levels, may lead to higher storage levels as we move into the winter heating season.

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How the EIA Gathers Storage Data…

The U.S. Energy Information Administration (EIA) collects data on end-of-week working gas in storage at the company and regional level from a sample of all underground natural gas storage operators. Data is also published at a state level in Natural Gas Monthly which includes tabulations of base gas, total inventories, total storage capacity, injections, and withdrawals at state and regional levels.

How is Natural Gas Actually Stored?

Natural gas is primarily stored underground and most commonly held under pressure in three types of facilities: depleted gas reservoirs, aquifers, and salt caverns. The principal operators of underground storage facilities are interstate pipeline companies, intrastate pipeline companies, local distribution companies (LDCs), and independent storage service providers. About 120 entities currently operate the nearly 400 active underground storage facilities in the Lower 48 states.

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Outlook

The latest inventory report (above) shows a net increase of 37 Bcf vs. the previous week. Stocks were 582 Bcf higher than this time last year and 627 Bcf above the five-year average. Immediately following the release of the report, the futures curve rose. The build was less than anticipated, and traders considered the report bullish. Current strip prices are listed below:

12 month strip = $3.053

24 month strip = $3.075

Cal Year 2017 = $3.154

Cal Year 2018 = $3.022

(all prices NYMEX only; A/O 7/5/16)

More…

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For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.

Luthin Associates

732-774-0005


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information

 

 

 

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LuthINformed- Issue 5, Post Polar Vortex Prices (Continued)

Published to LuthINformed, Issue 5 (June 17, 2016)

Winter Price Spikes…

The extreme winter weather in January 2014 resulted in seven out of the 10 biggest demand days on record for the U.S. The EIA attributed natural gas price volatility in the northeast to pipeline constraints heading into New York and New England from the west and south.

The Long Decline…

Natural gas prices have fallen dramatically since the beginning of 2014 when prices spiked during the polar vortex. The average NYMEX settlement price for 2014 was $4.415/Dth. The average, thus far, for 2016 is $2.022, 54% lower. The NYMEX settlement price has fallen 183% through June 2016.

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Time to act?

The June 2016 settlement price was 183% lower than the highest monthly settle of 2014 which occurred in February. As we approach the summer cooling season, the NYMEX NG contract for July has continually exceeded Henry Hub spot prices, perhaps reflecting expectations for higher summer demand. On its first trading day, the July contract closed more than $0.20/Dth higher than the expired June contract – an unusually high change for a contract rollover at this time of year. NYMEX futures prices have risen 13% in early June. Against this backdrop, an increasingly bullish picture may be emerging. Consider full or partial hedging as a way to capture recent lows and mitigate the potential for further increases…

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The chart on the above, developed by the EIA, projects an overall increasing price trend. It also shows that the potential for substantially higher prices is currently greater than the possibility for lower prices.

Source: EIA, Short Term Eenergy Outlook. Dated: June 7, 2016

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Outlook

The latest inventory report (above) shows a net increase of 69 Bcf vs. the previous week. Stocks were 633 Bcf higher than last year at this time and 704 Bcf above the five-year average. Immediately following the release of the report, the futures curve dipped. The build was more than anticipated, and traders considered the report slightly bearish. The 12 month strip (prompt July) lost 1.1 cents to close at $2.911/dth.

12 month strip = $2.911

24 month strip = $3.029

Cal Year 2017 = $3.044

Cal Year 2018 = $2.989

(all prices NYMEX only; A/O 6/16/16)

Natural gas inventories continue to set year-over-year highs. Strip prices have turned mixed with CY’17 above $3 and CY’18 now back under that level. The market charts below illustrate recent trends.

More…

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For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.

Luthin Associates

732-774-0005


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

 

LuthINformed- Issue 5, Post Polar Vortex Prices…

Published to LuthINformed, Issue 5 (June 17, 2016)

In this issue, we offer a look at natural gas prices since the Polar Vortex of January 2014. We hope to provide our readers with guidance and actionable information that will be both valuable and useful. As always, your feedback is welcome…

The January 2014 Polar Vortex…

The January 2014 polar vortex caused America to shiver like never before. Temperatures throughout the Northeast were lower than the South Pole, leading to unprecedented energy demand and posing safety risks. Throughout the region transit systems and schools were shut down. As demand skyrocketed, energy markets heated up. In the Northeast, where more than 50% of homes use natural gas as their primary heating fuel, several pipelines issued critical notices and operational flow orders (OFOs) to prevent system imbalances. Natural gas supplies were disrupted and prices reached all-time highs.

The vortex, which also threatened electric reliability, took its initial hold over two brutal days. On January 6, temperatures in in the Northeast fell to an average of -10°F, with a wind chill of -33 °F. On January 7, daytime temperatures bottomed out at 4°F in Central Park and -16°F in Chicago. Let’s further explore these impacts, see where prices have since been, and where they may be headed…

Bandwidths and “Mark to Market”…

In previous issues, we’ve discussed how certain ESCO contracts contain usage bandwidths that give suppliers the option to “mark to market” excess usage – and “pass through” higher market costs to customers. During the polar vortex, natural-gas demand averaged 102 billion cubic feet a day, nearly 8 bcf a day higher than the previous maximum monthly average demand and, all told, 241 bcf more natural gas consumption than any other month on record. Customers whose contracts had bandwidth provisions, and no weather protection clauses, had usage outside their contract allowances. Suppliers charged these customers market prices for the excess – at a time when prices reached their highest levels. How high? On January 6th, the Transco Zone 6 NYC spot price reached $90/Dth. On the 22nd it reached $120. On January 7th, as cold weather and supply constraints continued, the Henry Hub spot price was 39% higher than the year prior (see charts below). Exposure to prices at these levels can lead to immediate, and devastating budget implications. Clearly, a risk analysis and thorough contract review should be performed before entering any competitive supply agreement. An educated, informed decision process requires an understanding of potential risks.

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Next time we will continue with the discussion of post polar vortex prices in relation to winter price spikes and the long decline…


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

LuthINformed- Issue 4, Load Factor & Demand Response Programs…

Published to LuthINformed, Issue 4 (June 3, 2016)

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What is Load Factor?

There is a relationship between kilowatt-hours used and kilowatts of demand called the load factor. That is, the load factor is an expression of the energy used in relation to the maximum rate at which energy is used. A simple way to think of this is “how consistently your energy is used.”

Generally, the higher the load factor, the more attractive of a customer you are to an ESCO. This is because the majority of retail customers use more energy during On-Peak periods than Off-Peak. A higher load factor indicates more consistent, around the clock usage, which is consistent with how ESCOs typically buy the power – in blocks – which they then resell to their customers.

How is Load Factor Calculated?

The formula to calculate the load factor is: total kilowatt-hours (kwhrs) in the billing period divided by the result of multiplying the number of days in the billing period times 24 hours times the maximum demand (kW) in the billing period (see above). For example, if the customer used electricity at the maximum rate for each and every 30-minute period in the billing period, the resulting load factor would be 100%. If, on the other hand, the maximum demand is used for only half of the billing period, the load factor would be 50%. “Normal” load factors range from 25% to 60%.

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Demand Response Programs

There are several voluntary demand response programs currently available that compensate end-use (retail) customers for reducing their electricity use (load) during periods of high power prices or when the reliability of the grid is threatened. These customers receive payments from Curtailment Service Providers. A future issue will be devoted to these programs, however, it is important to know that any ESCO supply contract must be tailored to account for any Demand Response Program you may be currently enrolled in.

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Outlook

The latest inventory report (above) shows a net increase of 82 Bcf vs. the previous week. Stocks were 712 Bcf higher than last year at this time and 753 Bcf above the five-year average. Immediately following the release of the report, the futures curve moved higher. The build was less than anticipated, and traders considered the report bullish for short term prices. The 12 month strip rose 2.6 cents to close at $2.826 dth.

12 month strip = $2.826

24 month strip = $2.937

Cal Year 2017 = $3.017

Cal Year 2018 = $3.033

(all prices NYMEX only; A/O 6/2/16)

Natural gas inventories continue to set year-over-year highs. Overall, market prices have moved off recent lows with CY’17 and CY’18 now over $3. As prices begin moving higher, a long term fixed price supply agreement may be attractive. The following market charts illustrate recent trends.

More…

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For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.

Luthin Associates

732-774-0005


DISCLAIMER
Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.