A cold front this past winter overtook the greater U.S. Northeast for a two-week span, causing dramatic price volatility across the spectrum of energy sources and fuels. Now that the Northeast has officially entered the spring season, we reflect on a major weather event that took the region by storm.
Prominent news outlets coined several names for the extreme weather event, including the cold front, the polar vortex and the winter bomb cyclone. No matter the name, the temperature from December 22, 2017, to January 5, 2018, in much of the U.S., particularly the Northeast and Midwest, reached record-breaking lows and had a staggering impact.1
Looking at Boston, for example, the city’s temperature did not surpass 32 degrees Fahrenheit between December 25 and January 3. The entire Northeast region experienced similar low temperature days, leading to a hike in natural gas prices in Transco Zone 6 – which encompasses parts of New York, New Jersey and Connecticut – of more than 3,400% over two weeks. During the two-week period, there were 25% more heating degree days in the state of New York than in any of the past 25 years during the same date range. This record-breaking cold front drove up prices for the tri-state area’s energy and heating sources, including natural gas, heating oil and electricity. What ensued was substantial spot price volatility for all three commodities in the affected local regions – particularly those with greater transportation constraints. For example, in natural gas, volatility in the Henry Hub benchmark futures price – which settles based on deliveries in Henry Hub, Louisiana – was less extreme over the same period.
The cold front in the Northeast finally subsided on January 5 as temperatures rose and local natural gas spot prices began normalizing from peak highs. For example, in Transco Zone 6, the natural gas spot price closed above $140 per MMBtu on January 4 (vs. a Henry Hub futures price of $3.19 per MMBtu), and the following day fell to $10 (vs. a Henry Hub futures price of $2.89 per MMBtu). The natural gas futures spot price, priced at Henry Hub in Louisiana, was not immune from the geographic phenomenon, seeing a drop from a peak of $3.46 per MMBtu on January 2 to $2.89 per MMBtu on January 5.
The front-month futures for natural gas increased more than 25% between December 26 and January 5. However, spot price movements in Transco Zone 6 were far more extreme, experiencing a jump of around 3,400% from approximately $4 per MMBtu to about $140 per MMBtu (with a midday peak on January 4 of approximately $175 per MMBtu) due to pipeline congestion and the level of short cover in the area from utilities and power generators. Given that natural gas typically accounts for roughly 49% of Northeast power generation, electricity prices followed suit, rising from about $25 per megawatt-hour (MWh) to $327 per MWh over the two-week period. Heating oil, on the other hand, has an abundance of storage capacity in the New York Harbor. Due to the buffer stocks and lower transportation constraints, local heating oil prices increased approximately 7% during the cold front.
The two-week cold front caused an uptick in natural gas demand. Throughout fourth quarter 2017, Transco Zone 6 gas fluctuated within a range of plus or minus 50 cents per MMBtu. On January 4, the basis spread rose above $170 per MMBtu when the local spot price peaked at approximately $175 per MMBtu.
While gas in storage was plentiful going into the demand spike at approximately 900 billion cubic feet, the sudden surge in demand resulted in pipeline congestion – especially in Transco Zone 6 – meaning the buffer stocks could not efficiently move to demand centers. The spot prices at other pipeline trading hubs jumped across the country, but not close to the magnitude of Zone 6. Natural gas consumption in these regions rose approximately 76% on these days, causing the sharp increase in prices.
Power (Electricity) Market
Since power cannot be stored to address supply-demand imbalances, electricity spot prices are volatile by nature. In the New York ISO, spot power prices consistently tracked below the futures price throughout 2017. This suggests that during the year there was sufficient short-term supply to satisfy demand, even during brief demand shocks. The relative stability reversed course during the final two weeks of 2017. Spot prices exceeded the futures price because of near-term, weather-driven spikes in demand. The New York spot price rose almost 1,200% during the cold front when it hit an intraday high of approximately $370 per MWh on January 5. The spot price stayed above the futures price from December 28 until January 6 and subsequently reversed course back below the New York futures price.
The spot and futures prices of heating oil rose 7% and 5%, respectively, in fourth quarter 2017. The upward trend in heating oil prices should continue as demand for the alternative heating source remains strong.
Unlike natural gas, the heating oil basis spread has remained relatively stagnant. Although heating oil supplies in the New York Harbor have dropped significantly over the past year, the supply during the two-week cold front was still above average historical levels. Because of sufficient supply in the Northeast to fulfill short-term demand, spot and futures prices rose in unison.
The cold front from December 22 to January 5 caught trading companies, utility companies and everyday consumers off guard. The weather’s magnitude had the energy community scrambling to supply resources to keep homes and buildings in the Northeast warm. Commodities lacking adequate infrastructure to provide supply to the affected areas saw basis hikes unlike many instances before. This recent weather event was in many ways more difficult than its 2014 cousin due to both its depth and breadth.
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1 Unless otherwise noted, data cited in this article reflects figures over this date range.