East is East, West is West - U.S. Natural Gas Spot Prices Race to $600/MMBtu as Midcon Runs Out of Gas

Physical natural gas spot prices in the U.S. Midcontinent trading as high as $600/MMBtu, while Northeast prices barely flinch – that was the upside-down reality physical traders were contending with Friday in trading for the long weekend, with Winter Storm Uri bearing down on large swaths of the Lower 48 and spreading bitter-cold, icy weather from the Midwest and Northeast to Texas and the Deep South. The record-shattering, triple-digit spot prices, mostly all west of the Mississippi River, were indicative of some of the worst supply shortages the market has seen during the generally oversupplied Shale Era, or ever. But the East vs. West price divergence also marks the culmination of years of shifting gas supply and flow patterns that have redefined regional dynamics. The market will be digesting the various impacts of this still-unfolding event for days, but some of the effects and implications can be gleaned already from daily pipeline flows. In today’s blog we provide an early look at the market impacts of the polar plunge.

Last Friday, February 12, as most of the Lower 48 was cranking up the heat and hunkering down for some of the coldest weather in decades, the physical gas market went absolutely berserk. You wouldn’t know that from futures trading — the CME/NYMEX Henry Hub prompt futures contract last week dallied just under $3/MMBtu for March delivery and settled at $2.912/MMBtu Friday. But prices for physical “next-day” delivery of gas at the dozens of hubs across the U.S., which reflect the immediate and localized market for the long, holiday weekend, skyrocketed to previously unimaginable levels, with volumes trading at hundreds of dollars per MMBtu at many physical trading hubs — in some cases 200x the price just days earlier and three times the previous all-time highs (which were also in the triple-digits).

The futures-cash divergence is not entirely unusual. Futures prices represent today’s values for future delivery, whether next month or in subsequent months. So the futures market is more concerned with longer term supply availability, particularly as reflected by storage. The March contract had rallied nearly $0.50/MMBtu (20%), from the mid-$2.40s/MMBtu in late January to around $2.90/MMBtu in recent days (left graph in Figure 1) as confidence grew in the severe cold weather forecasts, which pointed to a rapid storage drawdown and the storage surplus vs. prior years flipping to a meaningful deficit within weeks. But there’s only so much gas that can be withdrawn day-to-day, and the general assumption was that any effects of the extreme weather event would wear off by March, leaving the market right back where it was before — with potential oversupply risks as the market transitioned to the low-demand spring season. (As of after-hours trading around 5 p.m. Central Time Sunday, the March contract was up $0.10/MMBtu to about $3.02/MMBtu.)