SoCal Gas city-gate's summer strip rebounds on storage withdrawals

The Southern California Gas city-gate's remainder-of-summer balance rose more than 30 cents over the past week after utilities ramped up thermal generation to cope with lower electricity imports, leading to a 1.5 Bcf net withdrawal from SoCal Gas' storage system.

The August-October 2021 contract average for the SoCal city-gate reached $6.37/MMBtu July 15, up from around $6/MMBtu during the week ended July 9, according to S&P Global Platts M2MS forward curve data.

A recent drop in SoCal Gas storage levels likely contributed to the stronger forward pricing, as the market priced in the increased risk of gas supply scarcity later in the summer. The SoCal Gas system withdrew more gas than it injected July 8-13, bringing total storage down from a year-to-date high of 77.5 Bcf July 7 to 76 Bcf July 13.

The steady pace of injections so far this season, despite historic heat waves in June and limited pipeline inflow capacity, have helped bring the SoCal city-gate summer strip down from the nearly $7/MMBtu seen earlier in the summer. The August contract had been particularly buoyant, reaching as high as $7.60/MMBtu on some days in June, reflecting concern over the potential for late summer demand spikes like what occurred last August.

Lower power imports

SoCal Gas dipped into storage to service a spike in gas demand caused by a drop in power imports. Wildfire conditions in southern Oregon hampered long-distance power transmission into Southern California from the Pacific Northwest. California Independent System Operator data shows that daily power imports dropped by more than 50%, falling to average 64 MWh/d for July 9-12 from a prior 14-day average of 140 MWh/d.

Thermal generation was called on to make up for the loss of power imports and overall higher demand conditions, ramping up to average around 365 MWh/d during the second week of July from around 240 MWh/d for the first week. California has only one coal-fired power plant in operation, making the ISO's category of "thermal generation" largely refer to natural gas.

The Bonneville Power Administration by July 13 had restored power transmission capacity, leading to a recovery in Pacific Northwest-to-Southern California power exports.

Outlook

In addition to the ongoing threat to power transmission from the Oregon wildfire, the availability of more gas-fired power generation capacity than previously expected has increased the odds that the SoCal Gas city-gate summer strip will continue to strengthen in the near term.

On July 15, the California Energy Commission approved Calpine's 648-MW Russell City Energy Center gas-fired power plant to return to service at half capacity in August. The combined-cycle plant had been offline since May, following a turbine explosion. Cal-ISO has also designated Calpine's 28.56-MW Agnews gas-fired plant in San Jose, California, as reliability-must-run, delaying the plant's planned closure.

Increased storage levels could be a moderating factor on the forward curve though, with SoCal Gas having already added around 800 MMcf in net injections since July 13.