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Natural Gas Storage Deficits Expected to Decrease

The May natural gas contract closed yesterday at $2.643/MMBtu, which is the lowest closing price since May took the front month position. The first injection of this season stands at 23 bcf, which is higher than the expected 13 bcf addition to storage. The total 1,130 bcf of natural gas in storage is 16.8% below last year and 30.9% below the five-year average. “The deficit in storage versus the five-year average is expected to decrease in the coming weeks as temperatures moderate across the U.S. The 6-10 and 8-14 day weather outlooks show seasonal near normal conditions across the Northeast” (Direct Energy). Prices increased from $2.50/MMBtu last Wednesday to $2.61/MMBtu this past Wednesday at the Transco Zone 6 Pipeline, which serves NYC (EIA).

An article released by the EIA this past Wednesday stated that at the Sumas trading point on the Canada-Washington border, natural gas spot prices averaged $161.33/MMBtu on Friday, March 1, which is the highest daily spot price anywhere in the U.S. since at least 2014. This spike in prices was caused by a limited supply and unusually high demand for this time of the year due to colder than normal temperatures from March 1st to March 4th. “The October 2018 explosion on Enbridge’s BC Pipeline- which transports natural gas through British Columbia, Canada, into the United States at Sumas, Washington- led to reduced flows and higher prices at the Sumas trading point throughout the 2018-2019 winter” (EIA). The daily natural gas flow in this pipeline averaged 610 MMcf/d from November 2018 through February 201 9; about one-third lower than the same period the previous year.

Natural gas pricing plays a key role in electricity power pricing due to the increasing reliance on natural gas fired generators as nuclear, coal, and oil generation is retired and mothballed. As the marginal unit of generation, gas prices are directly correlated to power pricing (more so in some regions such as NYC vs. others such as parts of PJM). We keep an eye on natural gas market fundamentals in order to provide insights into forward power pricing for our clients. Gas production is expected to continue to grow, however, there is speculation that demand growth will outpace supply primarily due to LNG and Mexican exports and increased power burn, presenting upside risk to power pricing in the future.

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