This post will be featured in our upcoming July 2021 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To sign up for the Monthly Monitor distribution list, click here. To download past issues, click here.
Over the past three and a half months, the NYMEX natural gas forwards for the rest of the summer have seen a meteoric rise in pricing from a recent low on April 6, 2021 of $2.60 to the current price of $3.66 (intraday on 6/30). Fundamentally, one could make a solid argument that a $4 handle is more than a remote possibility. Hot weather in June and high liquified natural gas (LNG) prices across the globe have kicked the domestic storage fill can down the road and delayed preparations for the upcoming winter, diverting flowing supplies to the immediate and higher priced demand. So for those that are caught sitting on the sidelines, waiting for a better opportunity to hedge, all is lost, right? While the best chance to hedge the NYMEX this summer may be in the rear-view mirror, not all is lost if you have facilities in the Northeast.
Pipeline receipts of gas in the Marcellus/Utica region are a good proxy to quantify the amount of production from that region. On June 28, 2021, a total of 34.6 Bcf/day (BNEF Data) was measured by pipelines in that region. On the same day a year ago, production out of the Northeast was 31.3 Bcf/day, or 3.3 Bcf lower than we are today. Production in this region is significantly higher year over year, but so is overall demand across the country, which is even higher, resulting in the NYMEX (Henry Hub, Louisiana) benchmark increase mentioned above. However, one aspect that hasn’t changed much in the last year is the amount of pipeline capacity capable of taking production to demand markets that want or need it. Compounding this lack of takeaway pipeline capacity out of the Northeast was the announcement earlier in June that the Pipeline and Hazardous Materials Safety Administration (PHMSA) had required TETCO, a major interstate pipeline that takes gas out of the northeast, to reduce the pressure in one of its lines “indefinitely” after an anomaly was found during an inspection. Higher production but lower capability to bring gas out of the region has resulted in a drop in the basis pricing that helps to offset the rise in NYMEX.
The chart below shows the historical pricing of Dominion South forward basis for the period August to October 2021, a primary basis index for the Northeast. As shown in the chart, forward basis on Dominion So. has dropped nearly $0.90 from year ago levels, a silver lining of sorts for anyone still short in the market right now. Major pricing drops in other Northeast basis indices have also been seen and include opportunities in the TCO, Transco Z6 (both NY and non-NY), and TETCO M2 markets. The common link in these Northeast pricing points is they all have more supply trying to enter their systems than demand they can reach, from which emerges a greater discount to the Henry Hub Louisiana NYMEX benchmark.
Developing a procurement strategy that allows you separate the various risk components in this complicated natural gas market is crucial to achieving your company goals and finding a “silver lining” in a bullish market is often difficult to do on your own. Let Edison Energy help you build a strategy that effectively manages the risk.