September 3, 2020

Is Southern California’s Gas Volatility a Preview for Others?

By Jeff Bolyard, Vice President Commodity Strategy

Being on the leading edge of anything can have both benefits and drawbacks, especially in energy markets. The state of California has a storied history of breaking ground in both successes and failures as it has plowed forward in developing an extremely vibrant and competitive renewables market for power generation. It has led to the creation of new industry terms like “duck curve” where the amount of renewables online has actually shifted the peak of power generation from mid-afternoon to early evening.

California recently made the news for rolling power blackouts that occurred on August 14th and 15th and caused hundreds of thousands to go without power. With plenty of blame and finger pointing at various groups, the real reason or combination of reasons still is not yet fully known. What is known is that extreme heat across the state contributed to the high demand resulting in a strain on all existing generation and upstream infrastructure for natural gas. This caused prices to spike in the spot gas market. Shown below is the historical spot pricing for the Southern California market, an area of significant peak demand with limited infrastructure or access to ample gas storage.

As the heat wave arrived and continued, access to natural gas became less and less available, causing the prices to more than double from the July average of $1.90 /MMBtu to the August average of $4.04 /MMBtu. On Tuesday August 18th, prices peaked at $13.25 /MMBtu. There are multiple events that came together to cause the recent price spike in California. However, the infrastructure and ability to deliver needed natural gas to California is extremely tight during peak demand days and has a finite limit similar to other areas of the country that do not have an excess of supply or pipeline capacity. What is becoming apparent in the form of Basis pricing (the differential between NYMEX pricing at Henry Hub, Louisiana and the area of actual consumption), is that there are areas that have an excess of supply and infrastructure, even during high demand, and areas that do not. These “have” and “have not” areas are becoming more and more visible in the forward Basis market for the upcoming winter and Calendar year 2021. There is significant gas price risk linked to gas pricing, not only in the benchmark NYMEX, but even more so in the Basis to these areas that do not have adequate supply or infrastructure during the high demand period of winter.

The next 12-18 months could draw significant regional price differentials between the “haves” and the “have nots” of natural gas, with the have nots seeing dollars or potentially tens of dollars per MMBtu in price risk, while the haves of the over supplied and areas with ample infrastructure enjoy NYMEX or sub-NYMEX pricing. Basis is the real risk this winter so make sure your company understands whether your locations reside on the side of the “haves” or “have nots” and cover that risk accordingly.

If you have questions or concerns, please reach out to your contacts at Edison Energy for a discussion or send us an email at