Wild, Wild West - Natural Gas Price Blowouts Signal Worsening Westbound Supply Constraints

Last week, even as natural gas day-ahead prices went negative in the Permian’s Waha Hub in West Texas, spot prices at northern California’s PG&E Citygate last week traded at a record-smashing $55/MMBtu, according to the NGI Daily Gas Price Index — close to 100x the Waha price. Other hubs west of the Continental Divide also surged to record levels, while markets just east and north of there were largely unruffled — a sure sign of bottlenecks for moving gas into West Coast markets. This is just the latest instance of severe gas supply shortages and constraint-driven price disruptions out West in recent years (even ignoring Winter Storm Uri and the Deep Freeze of February 2021). Moreover, it’s arguably taking progressively more benign market events to trigger similar or worse shortages. What’s going on? In today’s RBN blog, we break down the factors driving the latest Western U.S. gas price spikes.

Figure 1 illustrates the chasm that opened up in the U.S. natural gas spot market last week. Until November, cash basis at California’s citygate hubs — PG&E in northern California and SoCal in the south — had been averaging less than $1/MMBtu above Henry Hub. At the Opal, WY, hub in the western Rockies and the Northwest Sumas hub in Washington, basis was averaging at modest discounts to Henry Hub. That shifted last month with the arrival of wintry weather and the withdrawal season. PG&E and SoCal basis in November expanded their premiums to an average $8-10/MMBtu above Henry Hub, while Opal and Sumas flipped from discounts to premiums of $3-4/MMBtu. These, in most cases (except SoCal), were the highest monthly averages in nearly four years. As we now know, however, that was just the beginning.

Prices gained momentum in the last couple days of November and through the first week of December. Then, as an early-season snowstorm unfurled across the West Coast and parts of the Rockies, they headed for the stratosphere. While prices at Henry Hub and much of the country stayed below $5/MMBtu, absolute prices at PG&E Citygate rocketed up to as high as $55/MMBtu in trading for the weekend, according to NGI, and averaged nearly $42/MMBtu above Henry Hub. SoCal Citygate cash basis similarly climbed to more than $40/MMBtu, while Sumas and Opal basis averaged just under $40/MMBtu — levels not seen outside of the Deep Freeze of 2021, and in the case of PG&E Citygate, all-time highs. The premiums have held up and even surpassed those levels this week, with PG&E Citygate notching a $75/MMBtu high in trading for Wednesday's gas day. Moreover, they haven’t been isolated to the day-ahead markets. For instance, PG&E Citygate last Friday settled at a flat price of $90/MMBtu for the balance of December, while January basis closed at a premium of $28/MMBtu on the Intercontinental Exchange (ICE). Forward premiums have come off those peaks early this week but remain strong, and both cash and forward markets could experience further volatility as forecasters are predicting more colder-than-normal weather in the coming days.