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February 6th, 2014

Natural Gas Price Reaches Stratosphere In Northeast: New England States Issue Plan to Bring Prices Back to Earth

by Andrew Price, President & COO

The price of natural gas, purchased on the spot market, has reached historic highs this winter in the Northeast. In New York, prices toped $120 per MMBtu on the 22nd of January. In New England (see chart) prices hit $80 per MMBtu on the 23rd of January. In response, manufacturing facilities are shutting down and end-users across the spectrum are seeing their energy budgets blow-out in the course of just a few days. On Thursday January 21, a coalition of the New England states, issued details on a plan to mitigate future price spikes. Even if the plan is implemented, relief is unlikely to occur until the 2017/2018 winter. Given the magnitude of the price spikes and the severity of the economic impact, the proposed plan may not go far enough to ensure lasting price relief. 

The plan was made public in the form of a letter, addressed to the Independent System Operator of New England (ISO-NE), from the New England States Committee on Energy. The letter was signed by a representative from each of the 6 New England states. The plan calls for ISO-NE to “take all necessary and appropriate action to accomplish…” an additional 1 billion cubic feet per day of natural gas pipeline capacity into New England by 2018. Additional natural gas pipeline capacity will help close the enormous price gap that exists between New England and the Marcellus shale gas production region centered in Pennsylvania. The price of natural gas in Pennsylvania during the January price spikes? About $4 per MMBtu – more than 95% lower than the prices in the constrained parts of New York and New England.

Unfortunately, the wait for new natural gas pipeline capacity will be measured in years. In the meantime, CES has been busy helping clients with dual fuel capabilities to avoid as much of the pain as possible this winter. By reselling natural gas that was previously hedged, usually at rates less than $10 per MMBtu, CES has helped clients generate large credits on the worst days of the winter. On days when the price for spot gas exceeds $40+ per MMBtu, it is sometimes possible to sell the previously contracted natural gas for much more than the cost of the alternative fuel, typically propane, #2 oil or #6 oil. With heating oil costs at $24 per MMBtu, residual oil at $17 per MMBtu and propane in the $18 to $20 per MMBtu range, customers with dual fuel capabilities have been able to economically arbitrage their alternative fuel with natural gas many times this winter. In addition to benefiting the end-user, this activity provides some additional liquidity to a natural gas market that is severely constrained on peak winter demand days.

Another component of the New England States Committee on Energy letter calls for 1200 to 3600 MW of additional electric transmission capacity into the region. Stay tuned for a discussion on this in an upcoming blog…

Chart Credit: CES Analytical Team

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