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Speculating on the Efficiencies of the Northeast Summer Gas Grid

August 25, 2016 | By Luke Larsen

Natural gas is an efficient mobile commodity. It’s unique in a sense that as market conditions change around the country and directly alter local price structures, there is already in place an efficient layer of midstream opportunists looking to capitalize on any emerging price disconnects by utilizing existing pipeline infrastructure and capacity services. Those seeking arbitrage opportunities that might arise will eventually correct market inefficiencies through buying, transporting and selling within the observed points of basis or spread differential opportunity.

In this week’s “Get the Point,” we look at one of those potential arbitrage opportunities on Transco Pipeline and how it might already be nearing a maturity point as volatility begins to subside.

To begin, below is a recent view of the current cash-related spot basis spreads around the U.S. trading hubs, per the OPIS Natural Gas daily price index averages.

*Figure 1 – Source (OPIS-PointLogic Natural Gas Price Survey – August 16th, 2016)

*Figure 1 – Source (OPIS-PointLogic Natural Gas Price Survey – Aug. 16, 2016)

OPIS (Oil Price Information Service), an IHS Markit company, is one of the world's most comprehensive sources for petroleum pricing. PointLogic Energy, a division of OPIS, entered the realm of surveying and assessing the natural gas complex a couple of years ago from both the next day cash and also the bid week/baseload forward month perspectives. So as we continue to look at the pricing differentials in the rest of this analysis, we are sharing information from the actual source. Back to our review.

Over the last couple of weeks, our analytical teams have taken in-depth looks at the Northeast region from several perspectives: supply/demand balance, future production levels, pipeline capacity expansions and price imbalances within the region. In this "Get the Point," we will take a closer look at those same regional pipeline flows over the course of this summer to see what options existed or didn’t exist, and whether market participants made attempts to capitalize on or neutralize the impact from the widening basis relationships.

The past few summers, we have witnessed several fascinating developments involving the basis relationships specific to the Northeast region. The chart below shows a two-month current view of several cash price relationships. The item that jumps out is the cash basis volatility for Transco Zone 6 NY, but the absolute price is for the most part noticeably bound within a predictable range: Tetco-M3 as a floor and a semi-permeable ceiling of Henry Hub.  

*Figure 2 – OPIS/PointLogic Price Survey Daily Average (See Calculation Methodology in Markets Module)

Most traders are aware that this is not a recent phenomenon and, in fact, is simply related to warmer weather in the upper Northeast. When power demand pushes above 10 Bcf/d, we see delivered prices rise accordingly.

Figure 3 details the available supply growth evolution on Transco pipeline in the Northeast over the past five summers.

The underlying driver behind the original disconnect between Northeast prices and Henry Hub is the "long" supply situation within the region in which, outside of the handful of peak days during the warmer months, consumers have the upper hand. Consumers are the "price makers," because they understand the long supply implications.

 

*Figure 3 – PointLogic Energy Flows –Transco Pipeline

This demonstrates that supply made available to the region outstripped demand for the first time in the summer of 2014 and has since widened to almost 0.8 Bcf/d through the April-to-August period of 2016. We can quantity the impact from this roughly 2 Bcf/d migration by evaluating seasonal basis differentials for the same time frames. 

*Figure 4 – OPIS/PointLogic & ICE Cash Price Differerntials –Transco Pipeline

So the cash data shows that the basis discount appears to have peaked for the time being with that first summer that available supply overtook demand in 2014 and since then has normalized to some extent below ($0.90)/MMBtu, but we still have September and October of 2016 to weigh in with those periods seeing some of the larger discounts in recent years.

This normalization, or improved market efficiency, reflects the market's ability to balance, but it also demonstrates how the door to this opportunity could be closing. Market value extractors participate in a constant, furious extrinsic monetization process embedded within the next day cash or spot market.

The chart below overlays PointLogic’s modeled power demand for the Northeast with the OPIS Transco Zone 6 NY benchmark spot price, which further demonstrates the tight volatile cash correlation at this hub during the recent peaks of higher levels of demand.

*Figure 5 – OPIS/PointLogic Energy Cash Price (Transco Zone 6 NYC) and Northeast Power Demand

*Figure 5 – OPIS/PointLogic Energy Cash Price (Transco Zone 6 NYC) and Northeast Power Demand

But the primary question that remains is: Why does the additional intra-month demand still immediately command a market price convergence between two points that traditionally contained no such relationship of this nature?

The answers lies in the fact that direct price correlation occurs because the immediate competing market for roughly 500 MMcf/d of Leidy-sourced supply gas is to the south and/or east to market centers around Henry Hub (Transco Zone 3, Zone 4 & Zone 5 (non-wgl). Because of the continued capacity constraints of the nearby Northeast or Marcellus-driven supply centers, the only way to source additional supplies back into certain points on Transco in the Northeast is via gas-on-gas competition coming from buyers and sellers looking at Henry Hub-correlated prices which primarily exist just to the south of the current flow demarcation near the Carolinas.

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The ability to bring gas that far south did not exist prior to the Leidy Southeast Expansion, which was fully commissioned and finalized for the entire scope of the project in early January 2016. While it is difficult to assess this flow change utilizing Transco’s compressor data, PointLogic’s state-to-state throughput calculations reflects that the impact point of for this capacity is the Mississippi-Alabama state line. A visualization of this net change is shown in the chart below, which depicts our arbitraged basis pricing points of Transco Zone 6 to Henry Hub as well as relative throughput point associated with that capacity. So, basically, this chart shows that there is a direct correlation of Transco Zone 6 NY to Henry Hub prices and the calculated throughput value on Transco pipeline as it crosses the state lines of Mississippi and Alabama.

Yes, the market really does work. In these actual scenarios, as the Marcellus-sourced gas that currently fills demand needs in the Southeast coastal markets is moved back north by the agents of or the Leidy-Southeast anchor shippers themselves, such as Capitol Energy Ventures Corp., Anadarko Energy Services Company, MMGS Inc., Piedmont Natural Gas Company, Public Service Company of North Carolina, Inc., South Carolina Electric & Gas Company and Washington Gas Light Company (or agents acting on their behalf). The remaining Southeast regional needs are backfilled with other sources in the area.

This backfill, in turn, causes the throughput volume at this location to move higher with the Zone 6 price. The limited optionality for both the gas source as well as the immediate liquidity for the competing Northern markets that must flip from price makers to price takers, literally overnight as conditions change. As the chart below shows, the price at Henry Hub which shapes the entire grid is mostly unaffected by these transitional efforts, and this is because of additional flexibility within these more liquid regions.


*Figure 6 – PointLogic Energy Throughput Flows & OPIS Survey Cash Prices

We could take this analysis further, such as assessing whether the subscribed capacity holders are actually utilizing the capacity for their own needs because, as several of the capacity holders named above are direct consumers as well.

We could also look at how the gas sources change (if it all) on the receipt end of this capacity. But considering the cost of that supply, it shouldn’t change much at all. In addition, keep in mind that the expansion to the south was only 30 miles new of pipe, but did include significant additional amounts of compression; in fact, PointLogic expects that capacity should remain full under the currently constrained Northeast market conditions while the capacity holders continue to capitalize on some of the most valuable arbs that exist in the market today.

Regardless, this is a good demonstration of how flows change as the market corrects for inefficiencies. Based upon the immediate correlation of this particular example, traders, shippers and suppliers had better be quick if they are looking to synthetically capture or monetize any perceived value -- because it isn’t there long.

Stay tuned each week as we continue to unravel different elements of the market as the North American gas evolution continues into the upcoming winter.

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