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Energy Market Update: February 14, 2020

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Turning natural gas into energy has become a strong business model, but how is it affecting gas prices for the rest of the market? Direct Energy Business Strategist Tim Bigler breaks it down in this week’s Energy Market Update.


What happens when natural gas basis prices go up, while NYMEX prices go down? That’s exactly what buyers in Western PA and Eastern Ohio are experiencing now.

The Columbia Gas Transmission is a pipeline system in the Eastern and Midwestern United States. Basis prices, which represent the system’s price differential relative to the Henry Hub price, in this system are designated TCO. TCO prices have been climbing steadily for more than a year. Starting in late 2018 through present day, TCO buyers have been paying more for natural gas futures than the “standard” (or Henry Hub) price.

However, all the while that TCO basis prices have been inching higher, NYMEX prices have been inching lower. In other words: natural gas has been getting cheaper overall, while the premium for natural gas for TCO buyers has been increasing. The result, more or less, is a break-even; fixed prices for gas in TCO have hovered just above the $2/MMBtu mark since Q4 of 2018. While these circumstances currently favor buyers, there is no guarantee they will persist, as producers may begin to limit output if NYMEX prices (and therefore profitability for producers) remain low.

Fixed prices in the Eastern U.S., on the other hand (including Mid-Atlantic, New York and New England markets), have been dropping. This is due in part to mild winter temperatures, but other risk factors have caused prices to rebound at a potential price support of $2.35/MMBtu. While $2.35 is still relatively low, price rebounds at this level suggest that buyers may be wary of other risk factors -- or perhaps a different dynamic is at play.

Consider that modern gas turbine plants are capable of heat rates around 6,500 Btu/kWh. If a plant operator can buy gas at $2.55/MMBtu, that places their $/MWh production cost at about $16.60; add $4/MWh for plant operation and maintenance, and producers are still operating below $21 -- and far below $25, where PJM ATC prices are currently -- cost per MWh. So power producers are buying natural gas at a low price and selling power at a healthy margin. Conventional wisdom, and common sense, suggest that they will continue to do so as long as their margins are healthy.

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Posted: February 14, 2020