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The November wholesale natural gas slide yesterday by $0.052, settling at $3.747 on the day. EIA storage data showed in injection of 111 Bcf, higher than market consensus and the views expressed yesterday in our commentary. The build pushed inventories to 3,312 Bcf, or 91 Bcf lower than a year ago, bringing the year on year difference to the lowest level since the start of the injection season. Total inventory has now exceeded the 5-year average by 5 bcf. On the weather front, colder temperatures will give way to above normal temperatures by mid week in the Midwest and Northeast. The rest of October is forecasted to be above normal by most meteorologists at this time.
Constellation Energy announced yesterday that its retail energy business affiliate has started construction on a 16.1 megawatt DC grid-connected photovoltaic (PV) solar installation in Emmitsburg, Md. Part of the state of Maryland's Generating Clean Horizons initiative, the approximately $60 million solar facility will be financed, owned and operated by Constellation Energy. Renewable electricity produced by the system will be purchased by the state of Maryland's Department of General Services and the University System of Maryland under 20-year solar power purchase agreements. "Our state's growing 'green' sector is vital to our ability to create jobs and compete in the new economy," said Gov. Martin O'Malley. "I'd like to thank Constellation Energy for their commitment to helping us move toward our renewable energy goals. Together, we will continue to make Maryland a leader in the nation's efforts for clean energy, bring more green jobs to our communities and create a more sustainable future." Constellation Energy employs approximately 75 people to construct the solar installation, and expects that workforce to reach a peak of 150 people during the height of construction. The system is scheduled for operation in early 2012 and is expected to produce more than 22 million kilowatt hours of emissions-free electricity per year.
This morning we want to discuss a phenomenon in the wholesale natural gas market we have seen recently. Natural gas market participants watch indicators to determine where prices may be headed this winter. Current market indicators suggest that, because of possible pipeline constraints bringing natural gas to the Northeast (Coned, Lilco, PSEG, E-Town) , the price in that region by January 2012 may be almost $5 per million British thermal units (MMbtu) above the price in the major producing region in the Gulf Coast which is called the Henry Hub which represents the wholesale contract we discuss every morning bright and early. Their expectations of the spread between the Northeast and Gulf Coast prices have grown in recent months and now approach levels not seen since October 2008. Given the uncertainties of winter demand, natural gas customers in the Northeast often want to guarantee winter prices ahead of time.
The way they lock in these prices, they do this in two steps with financial instruments. Nymex wholesale contracts guarantee a price in the producing region (called Henry Hub, Louisiana) and basis swaps guarantee the price of transportation from producing to consuming regions. For the Northeast, the most important basis swap for delivery to New York is called Transco Zone 6 New York. Putting these two instruments together guarantees the entire delivered price of gas for part or all of the winter. Looking at New York basis swaps by themselves gives market participants a perspective on the value of transportation (rather than delivered natural gas) at a future date, or how much more they are willing to pay for gas in January 2012 in New York than in Louisiana. This difference reflects expectations about the likelihood of capacity constraints associated with moving natural gas on pipelines from one region to the other. Taking January 2012 as an example, shows that expectations of transportation costs to New York for the upcoming winter have changed considerably over the past three years.
Beginning in 2008, market participants were willing to pay about $5/MMBtu to guarantee winter delivery in January 2012 in New York City (During the first half of 2008, natural gas itself sold for $10–14/MMBtu). By 2010, market participants valued the transportation service to New York City for January 2012 from the Henry Hub at about one-half the 2008 levels. But last winter, it became clear that there could be severe constraints in delivering gas into the New York City area. That raised the price of natural gas along the East Coast to very high levels and made market participants rethink the value of transportation for 2012 as well. Throughout 2011, the price of January 2012 Transco Zone 6 NY basis swaps has continued to rise. They are now about the same level they were in 2008, although the underlying gas price is much lower.
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