Bomb Cyclone Sends Natural Gas Spot Prices to Record Highs

David Fessler By David Fessler
Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

Last week, it was downright cold virtually everywhere in the eastern United States.

From Maine to Florida, home furnaces struggled to keep homeowners warm. As a result, demand for natural gas skyrocketed.

In New York City, the spot price for natural gas hit a record $175 per million British thermal units (MMBtu), smashing the previous North American record of $125 per MMBtu set during the polar vortex of 2013 to 2014.

High natural gas spot prices can be attributed to a lack of pipeline capacity. Unsurprisingly, where the gas spot prices are the highest indicate where pipeline capacity is most lacking.

Getting natural gas to New York City and Boston is a problem. There just isn’t enough pipeline capacity to meet demands when temperatures plummet like they did last week.

Demand in the Northeast has been growing over the past few years. Homeowners have been choosing natural gas-fired furnaces over more expensive oil-fired ones and electric heat pumps.

When demand threatens to exceed supply, pipeline operators implement something called an operational flow order (OFO). An OFO is a mechanism that protects the operational integrity of the pipeline.

OFOs are issued if the pipeline has a problem. This could be a compressor outage or maintenance problem. OFOs are also issued when the pipeline simply doesn’t have enough gas.

That’s usually from high levels of demand, which is what happened last week… and it’s the reason spot prices hit the levels they did.

Natural gas gets from the well to your home furnace via a complex network of pipelines.

There are three separate but connected pipeline networks: the gathering network, the interstate network and the distribution network.

The gathering network is a system of small-diameter, low-pressure pipelines. This network moves natural gas from the wellhead to the processing plant.

The processing plants treat natural gas to remove undesired components. Once that’s complete, the natural gas is injected into the 217,000-mile interstate natural gas pipeline network.

As you can see, the network crisscrosses the entire U.S., reaching every major metropolitan area…

Some of the larger states have pipeline networks totally contained within the state. These intrastate networks are shown above in red.

Think of these networks as the interstate highway system for natural gas. Gas travels in these pipelines at high pressures, anywhere from 200 to 1,500 pounds per square inch.

Interstate pipelines are big. The pipes themselves are made from strong carbon steel. They are anywhere from 6 to 48 inches in diameter.

Gas eventually arrives at end users via the distribution pipeline network. This is a 2-million-mile network of small-diameter pipelines. They run along city streets and into customers’ homes and offices.

The point at which transmission and distribution lines connect is referred to as a “city gate.” It’s also the point at which natural gas is priced for delivery into that particular market. And it’s where a natural gas utility takes ownership of the gas.

And for many cities in the Northeast, the city gate is the weak link of the network and the one that sends gas prices higher – exactly as we saw last week.

While last week’s bomb cyclone is behind us, we’ll surely see more frigid temperatures over the next couple of months at least.

For this reason and others, it might be wise to invest in natural gas… and the companies that distribute it.

We have a few ways in which we’re making money on the natural gas market in our Oxford Resource Explorer portfolios… Sign up today for more information.

Good investing,

Dave