Two ruthless surges of arctic air, east of the Rockies, have taken over the eastern half of the country this month. The latest forecasts suggest that this weather pattern will continue to linger through the end of the month. Sub-zero temperatures are expected in the upper Midwest cities and the great lakes, including Chicago, Minneapolis and Detroit and possible below zero temperatures as far south as the Ohio River. Factoring in wind chill, temperatures are expected to be 20 or 30 degrees below zero. This weekend a couple of Canadian clippers will be followed by another arctic surge through mid-next week with conditions that could rival those from January 6, 2014. A Canadian clipper (a.k.a Alberta clipper) is a storm system during the winter months that originates from the Canadian Province of Alberta (or there close by). The term "clipper" originates from the quick speeds of clipper sailing ships. Thus, an Alberta clipper is a quick-moving winter storm system originating from Alberta, Canada. A clipper will usually bring smaller bursts of snow (generally 1-3 inches) along with colder temperatures and often times gusty winds (The National Oceanic and Atmospheric Administration).
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So far, the 2013-2014 winter has been exceptionally cold across the eastern half of the U.S. Arctic outbreaks and the bitter cold winds from the Polar Vortex have spilled across major natural gas consuming regions. Massive draws from inventory have been needed to meet surging demand for heating from the residential, commercial and electric power sectors. This season has been characterized by withdrawals that have been much larger than average.
Topics: Heating Season\, Polar Vortex, energy risk management, energy sourcing, Acclaim Energy Advisors, energy management consulting, risk management, energy, energy procurement, demand response, energy regulations, energy reliability, energy costs, power generation, Weekly Energy Insights, natural gas, energy management, energy management consultants, energy price spikes, Price Spike, energy blog, Natural Gas Supply, energy supply, U.S. energy, capacity markets, refueling season
A great deal has been made out of the need to shift away from coal fired power plants and toward renewable energy sources, such as wind and solar in the U.S. While this is certainly a laudable goal, the full impact of a move to renewable power generation has consequences beyond simply reducing emissions and finding alternative power sources. Specifically, determining how to effectively integrate these new power sources, particularly wind and solar, which are highly variable and can go from zero to full production almost instantaneously, pose significant challenges for grid operators.
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Besides an uneventful 2013 hurricane season, which “technically” ends on November 30, the natural gas injection season is also coming to an end. According to the Energy Information Administration (EIA) storage injection report released on November 7, 2013, natural gas inventories are 1.5% above the five-year average. The latest near-term weather forecasts suggest that the gap will increase during the next two or three weeks. In other words, according to the EIA, there should be sufficient natural gas in storage to meet the projected natural gas heating demand for the upcoming winter.
According to the Energy Information Administration (EIA), the electricity generation sector is responsible for over 90% of the total coal consumption in the U.S., and coal fired generation has historically been the most prominent source of electricity production. As seen in the graph below, however, natural gas has been increasing its market share as generation feedstock over the past couple of years. In February 2012, Coal and Natural Gas had the same percent share of power generation in the U.S.
Typically, discussions about drought conditions center on the impact a lack of rain has on agriculture; however, water and drought conditions have a significant impact on the energy sector as water is used for cooling purposes in power plants and the lack of water can negatively impact generation, creating stress on the electric grid during periods of high demand. While the impact of water on power plant output has been understood for years, the explosion in fracking has added another pressure point on the water supply.
Every year the Energy Information Administration (EIA) provides an updated Energy Outlook that projects future supply and demand trends. In their latest outlook, released between April 15–May 2, 2013, the findings on natural gas were particularly instructive, especially for energy risk management professionals. While the Outlook goes through 2040, the confidence level in the projections obviously decreases over time. Following is a high level summary of the reports’ projections related to natural gas and some thoughts on the impact these trends could have on energy risk management strategies going forward.
In April 2012, Cheniere Energy received final regulatory approvals to build a major liquefied natural gas (LNG) export terminal at Sabine Pass in Louisiana. This event rippled through the energy world, with concern growing that export natural gas would lead to higher domestic prices. Currently, natural gas prices in Asia are 3-4 times higher than those in the U.S. while prices in Europe are 2-3 times higher. In light of these spreads, industrial gas producers are urging the Department of Energy to approve LNG exports. However, the export of LNG is unlikely to have significant impact on natural gas prices in the next 3-5 years. Rather, other factors, such as new environmental regulations, are likely to be more significant drivers of natural gas prices.
Natural Gas Futures have been muted by the following factors due to Hurricane Isaac:
- Isaac had a hard time organizing, and it was upgraded to a CAT1 hurricane shortly before it made landfall.
- The last storm that disrupted natural gas and oil operations in the Gulf was Gustav (in 2008), and producers have made improvements to their facilities to better withstand severe weather conditions since then.
- Government data shows that 72% of U.S. Gulf natural gas output, or 3.2 billion cubic feet per day, was shut in as of Wednesday Aug 29. 2012.
- Gulf producers have reported little to no damage.
- Cumulative production loss of natural gas is under 17 Bcf since Monday Aug 25, 2012.
- Facilities are expected to be brought back on line quickly after inspections in coming days, if no damage is discovered.
- Inventory surplus is 14.6% higher compared to last year and 12.0% higher compared to the 5-year average for the same week.
- As Isaac makes its way inland, cooler temperatures and power outages resulting from the storm will offset much of the impact of the temporary supply loss.
Video Outlook: August 2, 2012
A larger than expected injection of 28Bcf triggered a sharp selloff in the natural gas market. Likewise, a shift in forecasts calling for less intense temperatures contributed to the pullback. The September contract is now trading below $3.00/MMBtu, so such price has now become resistance. We have seen bargain hunting at this level; however, the degree of weather driven demand will dictate the next move.