Dominion South Point

Northeast natural gas prices have been flipped upside down over the last couple of years and have shown unprecedented weakness relative to Henry Hub due to capacity constraints preventing booming production reaching new demand markets.  New infrastructure projects should relieve this congestion in the next two years but as we explain today, the current market view – expressed in the forward curve - does not appear to reflect that reality.

The NYMEX gas futures curve for 2015 was sitting right at $3.00/MMBtu yesterday (January 27, 2015) as colder weather has halted it’s recent slide. This still puts outright prices in the Northeast gas forward curve in dangerous territory for producers – very close to breakeven levels – through 2015 and not much higher even beyond this year. With NGL prices no longer supporting drilling activity for many producers in the region, the gas forwards market is becoming a bigger factor in signaling producers’ drilling prospects. Today in Part 3 of our Forward Curve Series, we continue our look at Northeast forward curves, with a focus on the Dominion South Point price hub, its historical shape and the fundamentals behind where it stands now.

In the dead of the natural gas winter season when US producers count on strong margins from higher gas prices, the Transco Z6 New York hub is trading on average nearly flat  with U.S. benchmark Henry Hub, LA – the delivery point for the CME NYMEX natural gas futures contract. This is a dramatic departure from historical winter norms in the Northeast market, where prices relative to Henry and just about every other gas hub in the Northeast have traditionally carried hefty premiums in the winter. Moreover, the forward curves indicate these basis levels are the new norm for Northeast pricing. The forward curve for Transco Z6 New York shows basis for 2015 barely above Henry Hub for the year, with several months at more than $1.00/MMBtu discount. Today we look at what’s behind major changes in northeast forward curves.

Natural gas prices for the nearby CME NYMEX futures contract at the Henry Hub in Louisiana have fallen by 38 percent from their high in February of $6.149/MMBtu to yesterday’s close at $3.847/MMBtu (July 24, 2014). Over the same period the price of CME NYMEX Appalachian coal has stayed virtually flat at $60/ton. So far falling gas prices have not increased power burn – the consumption of natural gas by power generators switching from coal. But natural gas prices in the Marcellus at Dominion South Point have fallen by nearly 60 percent since February to $2.46/MMBtu making natural gas a cheaper fuel than coal for power burn in that region. Today we discuss prospects for coal to gas switching this summer.