May 6, 2022
Winter Basis Pricing Spike Overshadowed by NYMEX Volatility
This post by Jeff Bolyard, Principal, Energy Supply Advisory, is featured in our recently released May 2022 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To read the full newsletter, click here. To sign up for the Monthly Monitor distribution list, click here.
If you’ve been on vacation over the past week or so, you may not be aware that the NYMEX natural gas market has been on a roller coaster. On 4/18, prompt NYMEX May closed at $7.82/MMBtu, only to lose $1.28 over the next four trading sessions to close at $6.53 on 4/22, then climb back up $0.31 over the next two sessions.
The extreme volatility, once reserved for hurricane impacts of years gone by, is now somewhat expected in the energy markets. Hidden in the shadows of this front-page commodity price volatility is the growing risk of “Basis” in certain regions of the U.S. Basis is the cost component that quantifies the regional price differential between the NYMEX benchmark location at Henry Hub, Louisiana, and any one of the dozens of regional price indices that are liquidly traded.
One such Basis point that has recently shown an extreme price movement that exceeded the rise in NYMEX is Transco Zone 5, a region along the Atlantic coast that has revealed extreme price strength during winter periods of higher demand (see the Southeast region writeup in the Monthly Monitor for additional commentary).
As seen in the Bloomberg chart below, the January 2023 forward basis pricing for Transco Z5 has risen from $1.55/MMBtu a year ago in April 2021, up to the current high of $7.00/MMBtu–an increase of $5.45/MMBtu over the past year. When combined with the current NYMEX price for January 2023, the current gas supply price for a customer in Georgia, Carolina, or Virginia that is fed off Transco would be within the $14.50/MMBtu range.
The causes of this extreme price rise in winter basis for Transco Zone 5 are many, but the bottom line is that even if significant production increases occur later this year where supply originates, the ability to get extra gas to the Southeast coast during the winter is limited due to the already maximized pipeline infrastructure feeding that region. There is some hope that there may be some price relief in the future, although it is unlikely to occur until after next winter has passed, if at all.
On April 11, the FERC (Federal Energy Regulatory Commission) approved the beleaguered Mountain Valley Pipeline, a 2 Bcf/day greenfield pipeline that plans to receive low-cost natural gas from Appalachia and deliver that gas into the heart of Transco Zone 5–the revised request of the pipeline to bore underneath ~180 water and wetland crossings. While this does not get the project across the finish line, it does breathe life into the process, which is more than 90% complete but still not guaranteed to ever flow.
