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Note: The following was sent out by CERA and has a short term forecast of
prices and alternate fuel pricing. Note the price differential forecasts by basin. ********************************************************************** CERA Alert: Sent Wed, November 15, 2000 ********************************************************************** Title: Midmonth Report: Early Warning Author: N. American Gas Team E-Mail Category: Alert Product Line: North American Gas , URL: http://www.cera.com/cfm/track/eprofile.cfm?u=5526&;m=1420 , Alternative URL: http://www.cera.com/client/nag/alt/111500_18/nag_alt_111500_18_ab.html ********************************************************* After a warm October, the first cold weather this year has provided an early warning of what winter could bring for the gas market. Cold weather across much of the great plains and a cold forecast for larger heating markets in the Midwest and Northeast have driven a surge in gas prices of more than $1.00 per million British thermal units (MMBtu) over the past week. This rebound in price highlighted the continued tightness of supply and moved the price of gas back above that of residual fuel oil, assuring that dual-fuel loads remain off of gas. Supplies for the winter are not adequate to allow most dual-fuel end users to burn gas. If this cold snap extends through the remainder of November, a heavy early-winter draw on storage could set the stage for unprecedented high prices through the winter. Though storage inventories have reached near the 2,750 billion cubic feet (Bcf) level, they remain at a record low heading into the heating season, and even a normal winter would reduce inventories to a near record or record absolute low by spring. This supply tightness places the gas price playing field in the broad territory above the resid price (near $5.00 in the Gulf Coast) and into a range potentially testing the next, difficult level of demand resistance. This resistance could come from switching to distillate oil, but low distillate inventories and high distillate prices mean that switching would require a gas price above $7.50 per MMBtu, and any move to switch to distillate would likely drive prices of both commodities higher. Rather, a combination of some switching to resid in industrial boilers and a shutdown of a few more price-sensitive end users may be required. None of these measures comes easily or cheaply, however, and they can be overwhelmed by weather-driven swings in demand. As a result, as cold weather settles in, CERA expects heightened price volatility at levels above the price of resid and extreme sensitivity in the market to weather and weather forecasts. Under normal weather conditions, CERA expects Henry Hub prices to average $5.70 during December (see Table 1), which by itself would represent an all time high for December. But even this estimate could prove low. If the current cold snap extends through early December, prices could easily climb into the $6.50-$7.00 per MMBtu range. Gas Storage-The Record Low Maximum CERA estimates that storage inventories reached a maximum of 2,746 Bcf as of the end of October, a record low for that month by 64 Bcf (see Table 2). Even this level was reached only through a fortunate combination of a lack of storms in the Gulf of Mexico and consistent warmth through most of October. The withdrawal season is likely to have begun this week, however, and in a strong way. The cold weather now settling in is likely to offset warmth early this month, increasing the withdrawal rate this November to 3.5 Bcf per day on average, well above the 1.0 Bcf per day average rate of the past two years. By the end of this month, the US inventory deficit is likely to have widened again, to 350 Bcf. CERA estimates that normal December weather would require storage withdrawals of approximately 17.0 Bcf per day, which is above last year's rate of 16.6 Bcf per day. This year, however, this withdrawal rate would apply consistent pressure in the market through December and beyond, as it would keep inventories on a path to reach 756 Bcf by the end of March, just below the 1996 all-time end-of-March low of 758 Bcf. So long as inventories remain on this path the pressure does not end even with the end of winter, as a significant increase in injections next year would be required for inventories to reach even 2.6 trillion cubic feet (Tcf) by next fall. Although the supply build will begin to help by late winter, it is unlikely to be of the magnitude required both to offset power generation demand growth and to allow this increase in storage injections to occur-unless demand continues to be priced out of the market. Demand-Keeping Warm After last year's warm winter, CERA expects a strong rebound in heating demand, and this week's weather and forecast reinforce that expectation. Weather last winter (November through March) was the warmest of the decade, and there will be a significant rebound in heating demand in the residential and commercial sectors as weather returns toward normal this heating season. Under normal weather conditions, * Average heating demand through the winter would be 3.5 Bcf per day higher than last year's. * Monthly average heating demand through the winter would be 36.7 Bcf per day, peaking at 45.6 Bcf per day in January. * December heating demand would increase by 4.8 Bcf per day relative to last December. Weather 5 percent colder than normal could further increase December demand by 1.8 Bcf per day relative to normal weather; likewise, a 5 percent warmer-than-normal scenario could decrease demand by 1.7 Bcf per day relative to normal weather. Fuel Switching With natural gas markets this tight, there is significant pressure for demand to be backed out of the market. Residential and commercial demand is inelastic to price in the short run, which leaves industrial demand and power demand as the only relief valve for the market. This winter we expect * all plants capable of burning residual fuel oil as an alternative to gas to do so * a loss of 700 million cubic feet (MMcf) per day of demand for power generation relative to last winter * industrial consumers to switch the equivalent of 500 MMcf per day off of gas * gas prices to act as a ceiling for residual fuel oil prices, as much as resid will act as a floor for gas For December CERA expects an overall demand increase of 4.5 Bcf per day relative to last December and a 14.4 Bcf per day increase in demand relative to November, with increasing heating load offset somewhat by fuel switching. Supply-The Rebound The pressure from increasing demand and lower storage inventories is intense, but US supply is beginning to rebound. The recent steep decline in US lower-48 capacity is expected to reverse in late 2000, given the soaring gas-related rig count. * The success in reversing the decline in the Gulf of Mexico is related to the combination of - the ramp-up of the Hickory and Tanzanite subsalt discoveries on the shelf, adding to the recent startup of the Muni field; these fields could add over 0.5 Bcf per day later in 2001 - the response of the shallow water to the strong late 1999 turnaround in drilling activity * Other important capacity additions are occurring in the deepwater Gulf of Mexico, with 0.5 Bcf per day in 2000 and 2001, and onshore, led by the Bossier sand play in Freestone County, Texas, the Barnett Shale play in Wise County, Texas, and the Powder River Basin coal seam play. * Further increases in drilling are likely to slow. New deep land rigs are under construction and shallow rigs are being refurbished with cannibalized parts from older rigs. Producers are experiencing delays in obtaining rigs as the supply of quality rigs depletes and drilling companies struggle to round out drilling crews. Regional Markets-Wild Winter in the West Extremely cold weather in the West has brought Rockies prices close to parity with Henry Hub prices and triggered early season spikes at Sumas in the north and Topock in the south. Pipeline maintenance on El Paso is exacerbating the regional demand pressure and has contributed to Topock differentials of over $2.00 per MMBtu. Tight pricing relationships to the Henry Hub in the San Juan and Rocky Mountains should hold through February, with significant widening in differentials as heating loads decline. Winter has arrived in earnest across North America, but the start-up of firm transportation service on Alliance is delayed once again, this time until December 1. Nonetheless, flows on the pipeline are under way; CERA estimates that flows during October averaged 450 MMcf per day. During November that total should climb to 750 MMcf per day, despite the later published start date. With or without Alliance flows, a weather-driven rebound in midwestern demand relative to November and December last year should keep prices in Chicago at a significant premium to Henry Hub prices. In the Northeast, differentials remain extremely strong and exposed to spikes throughout the winter, despite greater flows into the region from Atlantic Canada this year (see Table 3). CERA's outlook by region follows: * Rockies. Very cold weather within the region has brought Rocky Mountain prices near parity with Henry Hub prices. A break in the cold or a cold snap in the East will likely widen the differentials, but strong heating demand in the region will keep differentials within about $0.25 per MMBtu below the Henry Hub price. CERA expects a December average differential of $0.25 per MMBtu; however, this differential is expected to show significant volatility based on regional weather. A warm week in the Rockies could still push differentials toward $0.50 per MMBtu. * San Juan. San Juan prices will continue to hold close to Rockies prices through the winter, with significant pipeline capacity between the two regions. Heating loads in the Rockies will determine the San Juan to Henry Hub differential, with extended cold weather in the Rockies pulling both prices close to the Henry Hub price. CERA expects the December differential in the San Juan Basin to average $0.20 per MMBtu. * Permian and Mid-Continent. Unlike prices within the rest of the West, differentials between the Henry Hub and the Mid-Continent and Permian Basins are likely to trade within a relatively narrow range during the winter, as supplies from those basins are pulled either east or west, depending on regional weather. CERA expects a Permian to Henry Hub differential of $0.11 per MMBtu and a Mid-Continent differential of $0.08 per MMBtu for December. * Chicago. Alliance flows into the Chicago market are now running close to 750 MMcf per day. However, the onset of the heating season has offset those increased flows and pushed Chicago differentials up to near $0.15 per MMBtu relative to the Henry Hub, despite delays in the completion of the Vector pipeline. CERA expects the strong pricing at Chicago to continue, and December differentials should average $0.25 per MMBtu. * Northeast markets. Assuming normal weather, we expect to see December basis for New York relative to Henry Hub at $1.03 per MMBtu. New England will likely see prices $0.05-$0.15 higher, depending on the pipeline. Much of this increased basis differential is caused by fuel costs. For example, with a 9 percent retention rate from the Gulf Coast into New England, last December would have seen retention costs of approximately $0.22; at $5.70, that same retention equates to $0.50. Despite additional volumes of gas deliverable into the Northeast from the Atlantic Canadian fields, there have been no additional regional pipeline facilities to deliver this gas to the local markets, and an additional 166,000 MMBtu per day of potential demand will compete for the capacity. Because of this tightness, should this month's weather be colder than normal, we could see severe spikes in basis similar to those seen in January 2000. These spikes could even exceed the highs seen in January, depending on the severity of any cold snaps and the extent to which new electric loads are realized. Canadian Markets-Winter Begins The colder-than-normal weather has increased demand in western Canada but is only now being felt in the East. Storage peaked in the West in early October at approximately 225 Bcf below last year's level and 6 Bcf below the five-year average. Even with modest withdrawals since that time, storage inventories are still estimated to be adequate to meet winter needs. Easter Canadian storage has continued to grow, pushing levels to over 245 Bcf, 11 Bcf above last year and well above the five-year average. With the eastward movement of the colder weather, withdrawals are likely to begin. This higher level of eastern storage will be useful with the expected reduction of flows on TransCanada. The good news resulting from the cold is a more normal "freeze-up," which bodes well for a longer winter drilling season. Gas well completions are expected to reach 8,500 for 2000 and will likely be even higher next year. Further Delays for Alliance? The "commercial" in-service date for Alliance has been delayed until December 1, the result of a combination of problems with clearing the line, delays in the completion of the Aux Sable liquids extraction plant, the delay of Vector, and a lack of supply. The pipeline has been flowing gas, however, with volumes building up since September. It is estimated that flows for November will average 750 MMcf per day. TransCanada has taken the full brunt of the Alliance flows so far, with Northern Border and PGT remaining strong. December should see Alliance flows build to between 900 and 1,000 MMcf per day, with modest reductions in flows on Northern Border and PGT. Storage withdrawals will likely keep TransCanada reductions close to 350 MMcf per day, year- over-year, until Vector begins service to eastern Canada. High Prices: Strong Pull West The high demand in the Pacific Northwest has also provided strength for AECO. The AECO-Henry differential has dropped to the high $0.30s and low $0.40s as a result of this increased pull. For December, the differential is expected to average $0.50 per MMBtu, for a resulting AECO average of C$6.97 per gigajoule (US$5.10 per MMBtu). **end** Follow URL for PDF version of this message with associated Tables. ********************************************************* CERA's Autumn 2000 Roundtable event dates and agendas are now available at http://www.cera.com/event ********************************************************* ********************************************************************** Account Changes To edit your personal account information, including your e-mail address, etc. go to: http://eprofile.cera.com/cfm/edit/account.cfm This electronic message and attachments, if any, contain information from Cambridge Energy Research Associates, Inc. (CERA) which is confidential and may be privileged. Unauthorized disclosure, copying, distribution or use of the contents of this message or any attachments, in whole or in part, is strictly prohibited. Terms of Use: http://www.cera.com/tos.html Questions/Comments: webmaster@cera.com Copyright 2000. Cambridge Energy Research Associates
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