California to Feel the Pain of Arctic Blast 2,000 Miles Away

Back Bloomberg Dec 15, 2016 By Naureen S. Malik

It’s freezing in Chicago, and California could feel it — in the form of a bump in natural gas prices.

California may see prices for the heating fuel rise as the state’s biggest gas storage field remains shut after a massive leak last year. That makes it increasingly dependent on gas supplies from the Midwest and other regions where a strong blast of arctic air is forecast to deliver a deep winter chill over December, stoking demand for the fuel across the U.S.

“SoCal is unquestionably more dependent on flowing supply in the absence of withdraw-capability from Aliso Canyon,” says Rick Margolin, a senior natural gas analyst at energy data provider, Genscape.  “If SoCal demand rises at the same time demand rises in those other markets, that puts SoCal into a bidding war.”

The potential for price spikes across the U.S. underscores how historically regional gas markets are becoming more interconnected, especially with the reversal of one key pipeline that now ships gas from shale formations in the eastern U.S. westward. The shutdown of Sempra Energy’s Aliso Canyon gas storage site in Southern California last year has only increased the region’s dependence on supplies elsewhere, with the state drawing the fuel from as far off as Canada, the Rocky Mountain region and West Texas to keep warm.

Spot gas at a Southern California benchmark known as SoCal Citygate has gained 9.6 percent so far this month to $3.84 per million British thermal units on Wednesday, Dec. 7, on the Intercontinental Exchange. That’s almost 8 cents above the U.S. benchmark Henry Hub in Louisiana, the delivery point for futures traded in New York. At the start of this week, SoCal prices climbed to a two-year high.

Gas there has risen even as Southern California is enjoying relatively mild weather. While the eastern U.S. gets blasted with arctic air, Los Angeles was forecast to see a high temperature of 66 degrees on Friday, according to AccuWeather Inc. Chicago’s high was expected to be 25 degrees.

California regulators are considering a request from Sempra to start injecting gas back into the Aliso Canyon storage field, but the state says it won’t finish its safety review of the site until next year. Until then, the gas market remains vulnerable to price spikes, according to Bloomberg New Energy Finance gas analyst Het Shah.

Gas consumption in the U.S.’s largest economy dropped on Thursday to the lowest level for the time of the year since at least 2012 amid milder weather. Demand will start to gain in the coming days, rebounding 32 percent to almost 7.8 billion cubic feet on Dec. 17 from a week earlier, according to BNEF forecasts.

“Aliso Canyon isn’t available,” Shah says, “so making up the difference is why there is going to be a lot more volatility in cash prices.”