jan 2014 natural gas update
DESCRIPTION
Cascadia Energy , British ColumbiaTRANSCRIPT
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Energy Report
Storage Report Emptying Fast … page 5
Natural Gas Edition
BC Energy Update
Why all the elements were there…
Protect yourself next winter
page 9
Natural Gas Spikes
Why all the elements were there…page 3
Volume 1 Issue 1 January 2014
Long Term Outlook page 7
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energy report
Cascadia Energy Ltd.
Head Office
Suite 201 720 Beatty Str
Vancouver BC V6B 2M1
604-687-6663
Vancouver Island
#306 - 1095 Mckenzie Dr
Victoria BC V8P 2L5
250-704-4443
www.cascadiaenergy.ca
Nick Caumanns
604-961-8707
Steve Connelly
604-315-7009
Tom Barnes
250-704-4443
It’s hard to argue that natural gas is a great form of energy. It
burns easily and cleanly. It’s relatively abundant and easy to find
and release. It is also quite easy to transport, to move from place
to place, reasonably cheaply.
The resurgence in natural gas has been a dream from many.
Environmentalists love the carbon reductions. End users like the
low costs and clean easy combustion. Everyone likes that they can
get it piped to virtually anywhere they need.
Not all, however is rosy. Production, once a well has been
tapped, is reasonably steady, declining over time as the pressure
drops. For the same reason, you can’t just crank up the delivery of
natural gas at will so when we need more of it, such as in winter, it
has to come from somewhere.
That somewhere is usually a storage facility, underground or
LNG, or from increased deliveries through fixed diameter pipelines.
We all know what happens when high demand, limited availability,
and an open market place intersect.
If you didn’t, you probably found out this December. We
have, after years of a supply glut, a sudden resurgence of volatility.
Will it last? That depends on storage, new demand, production
restrictions, and other variables.
We’ll touch on some of those in this issue. We hope it’s
useful.
Nick Caumanns
Opening Note…
What’s with the cover photo?
Cascadia Energy Ltd. serves numerous greenhouse clients throughout BC. January is the
month of the big agricultural show in Abbotsford and, not least, greenhouses are large
consumers of natural gas. After all, if you live in a glass house you’d expect your gass bills to
be of concern. You could say that flowers are made of natural gas.
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Low Temps,
High Prices
The intense volatility of natural gas
prices was on full display last
month with weather, exchange
rates and supply restrictions
combining to drive prices skyward
for BC customers.
While for now January prices
appear to be coming back to earth,
last month got off to a brutal start
with a rare yet wicked weather event
that gripped much of eastern Canada
and the US with record low
temperatures.
The so-called polar vortex
clamped down on much of eastern
Canada and the US placing heavy
burdens on storage draws as
consumers on both sides of the
border cranked up the heat to stay
warm or keep their businesses up and
running.
According to the US Energy
Information Association, 285 billion
cubic feet of gas was taken from
storage for the week of December
13—the largest withdrawal since
record keeping began in 1994. As a
consequence the Henry Hub
benchmark rose 60 cents higher than
the previous month. In BC similar
pressure was placed on reserves
triggering a decline in liquidity at
Sumas causing significant price
increases.
The unusually cold weather
continued to keep prices elevated
through the balance of the month
and early into the new year.
However, some analysts say that
even with more sub-zero
temperatures on the horizon for the
coming weeks the wild price spikes
that closed 2013 likely won’t
continue.
“Preceding the record high gas demand and prices during the polar vortex was an early start to winter, eight major winter storms resulting in multi-year high prices,” said Samantha Santa Maria from Platts, a
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US-based energy analysis firm. “In short: the market was already inflated prior to being whacked with the polar vortex. What we have now is a period of relatively lax demand and waning prices.”
While the so-called polar
vortex sidestepped the west, the
early days of December brought their
fair share of chilly weather to BC.,
prompting Fortis to issue
curtailments. During times of
curtailment Cascadia Energy, as a
supplier, still needs to ensure we
have enough gas on hand to meet our
clients’ requirements. However, as
was the case while the east was in
the deep freeze, when the amount of
available gas goes down due to nasty
weather the price, fueled by demand
heads north. On average, day prices
varied from $5.38 to $6.48 with a
peak day of $10.75.
And to round out December’s
perfect storm for higher prices was
the Loonie’s lackluster performance.
Natural gas is traded in US dollars and
on December 3 saw the Canadian
Dollar bottom out at a three-year low
at $1.0673. On
average the
underperforming
dollar tacked on
around 50 cents
a gigajoule to gas
purchases made
in BC. for
December.
All told
December 2013
confirmed the
oft repeated
adage that
natural gas is the
most volatile
commodity in the world. What
December did was magnify in a very
big way all the elements that
contribute to how pricing is
determined each month.
For more information please contact Tom
at his email [email protected]
Figure 1 Advent of NG trading on NYMEX in 1994 is when volatility began.
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What Storage
Means for
Prices
The extreme cold throughout
North America has begun to take a
toll on levels of underground
natural gas storage, drawing levels
lower than they have been for
years.
While it continues to be true
that the fundamentals for natural gas
look good, drilling, deliveries,
demand, etc, there is no doubt that
the market has responded to the
extreme weather with strong upward
price signals.
Although this says something
about supply and demand, it tells us
more about the nature of gas
marketing and trading. Prices go
down reluctantly, as they have over
the past few years in the face of
enormous new supplies coming to
the market, but at the sign of any, no
matter how seemingly short, crisis
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prices tend to spike up and linger.
Of course a market driven by
speculative price setting mechanisms
will tend to factor in speculation and
in our current market the psychology
of betting on higher prices attracts
more activity than the other way
around.
We are now below the bottom
of the 5 year storage range. While
this in itself is somewhat
meaningless, it has an impact in how
traders approach the market.
Low spring storage levels imply
that there will be summer demand
for gas, which will tend to drive the
summer forward price upwards. On
the other hand, early storage refill
tends to make futures prices for the
next winter lower later on in the
summer.
Last spring we had normal
storage levels but, because of a small
difference between the spot price,
the rate the gas is put in, and the
future winter price, the price at which
gas would be taken out storage, refill
was slow early in the summer. This
resulted in low late summer storage
and high winter futures prices.
Given our current position in
terms of storage it is likely that we
will see strong summer pricing from
here on. That could mean storage
will refill quickly and possibly depress
winter prices in the back half of
summer.
All said though, there are so
many variables that the outcomes are
too unsure to predict. One thing is
certain, prices will likely stay strong
right through the spring and summer.
Figure 2 Sumas Day Price $ US before conversion @ $1.08
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In the longer term…
While no one knows where prices will go in the next day, never mind the next
30 years, there are some long-term projections out there. They try to account for
long-term resources and demand estimates to see if we will either “run out” or
“be awash” in natural gas. It seems, from reading all of the reports, that over the
lonhg haul we will stay in good supply/demand balance and, as a result, no major
long-term price upheavals.
Prices in 2013, even barring the December anomaly, have been higher than 2012.
The price increases in the near term are due to growth of consumption in the
industrial and electric power sectors and growing demand for export at LNG
facilities. It is expected that 2014 onwards we will see a sustained increase in
production, which should lead to slower price growth over the longer term.
The U.S Energy information administration projects that the Henry Hub spot
natural gas will reach reache $4.80 in 2018, which is still less than 80 cents higher
than in 2013. The stronger near-term price growth is followed by an increase in
supply eventually causing prices to settle at $4.50 in 2020, which, while higher
than 2013, represents about a 10% shift over 7 years, hardly reason for worry.
After 2020, the EIA expects that increases in natural gas spot prices will be driven
by continued but slower growth in U.S. demand and exports to reach $7.65 in
2040, an increase of just iver $3.00 from 2020, but again covering quite a long
period of 20 years.
Regional spot price projections will follow the same general pattern as the Henry
Hub spot price. While this projection is for the US, it is generally understood that
the prices for Canadian gas will track quite closely to this.
None of this means that we won’t experience periods when prices are high due
to interim weather, political, or other factors but it does show an underlying
long term confidence in natural gas from the US government.
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Fix Your Future
While one month of high prices
should not drive our behaviour, if
that event provides some new
information we shoud pay attention
to what it teaches.
The major factor that has changed
from the past few years duing which
we enjoyed low prices at Sumas
despite cold weather events is the
amount of freely available gas at the
Sumas market point. This is referred
to as liquidity.
Over the past few years producers
have slowly let their long-term
capacity from northern BC to the
lower mainland lapse. They then have
the option of shipping gas either
south or east based on price, without
having the sunk cost of a take or pay
pipeline contract. The gas then flows
on “IT” or interruptible transport
contracts.
Since IT contracts are less secure than
firm producers supplying gas at
Sumas who have “must supply”
contracts end up bidding for
increasingly shrinking supplies of
guaranteed firm gas. That of course
drives up the price for them but
what’s the real shame is that it drives
up the index, the price paid by
everyone else for their gas.
The simple analogy is that upon
booking a hotel room, you find there
is a convention in town and, even
though you booked a room, your
room rate will depend upon what
they charge the person getting the
last room. It’s likely to be a much
higher rate.
Going forward we would
recommend that clients always fix
winter pricing for at least 50% of
their volume. This should protect
against unreasonable price spikes
while allowing some opportunity to
participate in variable pricing should
the market remain soft during
warmer weather.