Constraints in New England likely to affect regional energy prices this winter
January 18, 2013
Since November, New England has had the highest average spot natural gas prices in the nation. Average prices at the Algonquin Citygate trading point, a widely used index for New England natural gas buyers, have been $3 per million British thermal units (MMBtu) higher than natural gas prices at the Henry Hub, and more than $2 per MMBtu higher than average spot price at Transco Zone 6 NY, which serves New York City and has historically traded at prices similar to those in New England.
Full pipelines from the west and south limit further deliveries from most of North America, while high international prices and declining production in eastern Canada pose challenges in making up the difference from the north and east, except at higher prices.
As a result of these market conditions, New England natural gas and electric power prices this winter could be volatile at times. During November and December, spot natural prices in the northeastern United States seesawed in relation to weather-driven pipeline constraints. This price volatility has continued into January 2013 to date.
However, spot natural gas prices in New England so far this winter have still been less expensive than those in northwestern Europe, meaning that it continues to be more attractive to deliver a spot (or unscheduled) cargo of liquefied natural gas (LNG) to Europe than to New England.
Looking to the rest of this winter, recent forward market prices indicate that New England’s high natural gas prices could persist and rival northwestern European prices, especially this month (see Figure 2). In that case, New England may receive spot cargos of LNG.
Forward prices reflect monthly values. In the Northeast, forward natural gas prices in the winter typically reflect expectations that for some days, weather-driven constraints may lead to very high prices, while other days may see more moderate weather and prices. For example, a natural gas basis swap (which reflects the difference in effective price between a given point and the reference pricing point of Henry Hub) for the month of January covers 31 days. A forward basis swap valued at $6 per MMBtu could underpin an assumption of 20 days, with average prices of $4.35 per MMBtu and 11 days with prices averaging more than double that, or about $9 per MMBtu.