FERC Market Update: Gas Prices Have Hit Resid Floor

Now at the $8+ level, natural gas prices have reached their alternative fuel (resid) floor and are unlikely to go much lower this winter unless the "extraordinarily warm" weather would continue right on through February, according to a market update presented at the Federal Energy Regulatory Commission (FERC) meeting Thursday.

"At current resid prices it is unlikely gas can fall much further this winter," Steve Harvey, deputy director of FERC's Office of Market Oversight and Investigation, said, pointing out that gas prices tend to run in between the equivalent price of resid and heating oil in New York. They are operating at the lower end of that range and in fact "have met their effective floor in New York." While the relationship may differ somewhat in other parts of the country, nevertheless "oil has a strong influence on gas prices."

A scenario where the alternative fuel floor would not hold and gas prices could plunge further would be "if so much inventory was still in storage at the end of the winter that physical operations required its owners to remove it no matter what the price. This is unlikely unless current weather conditions continue through February," Harvey said. He cited the "ninth warmest November in 111 years," the exceedingly warm weather running from the second part of December to date, and predictions it may continue for at least a couple more weeks as the reasons gas inventories are so high currently. The National Oceanic and Atmospheric Administration (NOAA) shows heating degree days for the first two weeks of January were only 66% of normal.

But "there is something else going on as well." Harvey said FERC staff now is doing some research into why there appears to be a lower level of storage withdrawals for every degree of cold weather this winter.

The out months of the futures market suggest under normal conditions prices will cycle from a $9 summer price to $11 in the winter for the next couple years, Harvey said, until more LNG becomes available.

As for the current LNG situation, preliminary estimates show 2005 LNG imports at 630 Bcf were less than the 653 Bcf brought in in 2004 and considerably less than receiving terminal capacity. This situation could continue for the next several years because the much more expensive and complex construction of upstream liquefaction facilities does not equal receiving terminal capacity around the world.

"We are starting a new world market on the back of LNG and we don't exactly know where it's going to go," Mark Robinson with FERC's Office of Energy Projects, said. He pointed out that as long as the U.S. offers lower prices, spot cargoes will go to other countries offering more. Spain has been paying $12/MMBtu and Japan $17/MMBtu, he said. More liquefaction facilities are being built, but there will likely always be more receiving capability than liquefaction.

Last year 70% of U.S. landed LNG came from Trinidad, and Algeria was the country's second largest supplier, said Jeff Wright, also from the projects office. In recent months, however, Egypt has become the second largest supplier to the U.S. Wright said the five new regasification terminals currently under construction in the U.S. would add 9.2 Bcf/d in capacity, while proposed terminal expansions would add 5.1 Bcf/d. Other projects are in the pipeline. At the same time expansions in liquefaction in Nigeria and Trinidad over the next several years should make more LNG available.

The commissioners questioned FERC staff as to the level of demand destruction from the high prices over the last few months of 2005, noting reports that it might have been less than expected. Harvey said staff now has in hand pipeline flow information and would be studying that to determine demand strength.

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