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The Perfect Storm Sends Natural Gas Crashing

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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Why $25 NatGas Is Possible This Winter

For families using natural gas in their homes, this could be an expensive winter... or a cold one without heat. New England consumes the most liquid natural gas (LNGs) out of anywhere in North America primarily due to high population density and colder climate. Historically, the price of LNG rises in correlation to snow storms. Because of bottlenecks in the pipelines for LNG, supply is limited in the North East and a demand surge can cause a spike in price.

In 2015, there were only 6 million homes that use traditional heating oil in New England, whereas nearly half of households in the United States use natural gas. Towns that don’t run gas pipelines could also have propane delivered. The pipeline bottleneck is unfortunate for New Englanders who use natural gas especially during a time when prices are exceedingly low. Demand for LNGs is at an all time high and low crude oil prices is suppressing the value further to a spot price around $2.70 per mmbtu. Natural gas reliance is only increasing with the continued effort by the United States to shut down coal plants. For natural gas users, locking in at a low price is highly sensible, or simply buying more blankets.

Consolidated Edison, Inc. is a public company that invests significantly in natural gas transmission projects. They believe natural gas prices could rise to as much as $20-25 mmbtu this winter in the North East. Investors should be on the watch to see how the company reacts over the season and how their projects pan out.

Spectra Energy Corp. is currently working on expanding the Algonquin Pipeline, allowing it to carry 342 million cubic feet of natural gas per day to Boston and surrounding cities. The $876 million project is being met with considerable roadblocks from protestors and a potential conflict of interest among those at the Federal Energy Regulatory Commission (FERC) who approved the plan for the project. Related: OPEC’s Gloomy Long-Term Outlook For Oil Markets

(Click to enlarge)

Source: Spectra Energy Corp.

When the project is completed later this month, Spectra shares will likely rise. Engie SA regularly makes LNG tanker deliveries into Boston, helping reduce the strain on the pipelines. Spectra is indirectly competing with Engie and if they’re able to reduce Engie’s obligation in New England then the France based company’s shares could drop.

With all of this expected volatility, call options are a strong investment choice in the market for natural gas. Investors should look at the weather forecast to better predict when these spikes will occur and react accordingly. Spreads between the spot rate for Algonquin pipeline and Henry Hub could also earn high yields. Other natural gas suppliers will profit if prices rise as high as Consolidated Edison predicts.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Oilracle on November 09 2016 said:
    --"The $876 million project is being met with considerable roadblocks from protestors"--

    We shall see if Russia and the Saudis will continue financing the anti-energy motley groups inside the USA
  • R. L. Hails Sr. P. E. (ret.) on November 10 2016 said:
    There are powerful anti- carbon political forces in New England, NE. They killed coal power plants. They killed nuclear power plants. They killed pipe lines which import liquid and gaseous carbon fuels to NE.

    It gets cold every winter in NE. When there is not much supply, prices go up. When prices go up, companies which rely on cheap fuel go broke or leave the area.

    The above has been this way for generations in NE.

    When people are cold and hungry, things will change but obviously not before.

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