Energy Market Update: October 16, 2018

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Natural gas prices have soared this year. Demand-related risk premiums are the cause, but what happens when a new pipeline increases supply? Today, we’re examining the effects of a new pipeline into a gas-hungry region.

 What does this all mean? Here’s our take:

Atlantic Sunrise Pipeline

Williams’ new Atlantic Sunrise Pipeline came online this month. The pipeline connects Eastern Pennsylvania’s dry gas region to the existing Transco natural gas pipeline, where it may be transported to high-demand regions in other states. One such region which could end up using a lot of this gas is Transco Zone 5 (Z5).

Transco Zone 5

This zone covers the Carolinas and Virginia. Neither North Carolina nor South Carolina produce any natural gas, so all their gas comes in via interstate pipeline. It would seem that introducing new gas supply into such a high-demand region would help offset basis prices, but the numbers tell a different story.

Basis price is the wholesale natural gas price at a given location minus the price at Henry Hub. The basis price for Transco Z5 for both 2019 and 2020 did drop in response to the Atlantic Sunrise Pipeline coming online. However, the risk premiums that we’ve watched drive natural gas prices up all year were held at bay only momentarily. Very low storage levels and high overall demand (thanks to domestic demand, new exporting opportunities and storage demand itself) continue to keep prices elevated.

What can we learn from this? For now, demand appears to be leading the charge when it comes to price, and new supply does not erase existing risk premiums.

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