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Today’s Market Says BRING ON THE COLD!

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The NYMEX natural gas prompt month (prompt month means the most immediate contract for delivery, October 2012, in this case) contract closed Friday at $2.943. It was a choppy and volatile week in which the prompt month gained $.26 after two large moves higher on Monday and Tuesday. The market has largely been in a range of $2.60 to $3.00 for the past 3 months, with some stubborn fundamentals that have so far prevented the market from trading above or below that range.

Of significant importance is the process of shutting down a coal-fired power plant in favor of running a natural gas-fired power plant. This occurs when gas prices are very low (as they are now) and it is more economical to switch from coal to gas in the generation stack - typically coal is dispatched before natural gas as it has historically been cheaper to run.  But the low price environment has made the switching not only possible, but extensive, adding a significant amount of demand to the market. At different natural gas price points, the amount of switching can vary. We have seen more switching occur at prices below $2.60 (boosting demand) and less switching above $3.00 (reducing demand) and this has helped keep prices in a range.

As the market moves into winter, we are paying close attention to the amount of natural gas in storage, currently at 3,429 bcf. An increase in the amount of proven natural gas storage to 4.239 tcf, and although we won’t threaten to bump up against that level, we should have a record amount of gas in storage as we move towards winter, with many estimates calling for 3.95 tcf of gas in storage by October 31, 2012.  This should provide a healthy buffer against high demand which a cold and prolonged winter could cause.

Posted: September 21, 2013