SoCal city-gates basis nears $4 premium as winter reaches California

Weather forecasts show that winter has come to California, with lower temperatures expected to trigger strong gas demand and widen SoCal Gas city-gates' premium to cash Henry Hub to fresh season-to-date highs over the next two weeks.

Already, the Southern California gas demand benchmark price has seen its basis reach a season-to-date high of $3.96/MMBtu in morning trading Dec. 10. The basis spread has steadily increased month-to-date, rising from 39 cents Dec. 1.

Temperatures in Los Angeles and San Francisco fell 8 degrees Fahrenheit and 7 degrees F respectively week-over-week, boosting power generation 41 GWh/d for the most recent seven days of California Independent System Operator data available (Dec. 3-9) over the prior seven (Nov. 26 – Dec. 2). Thermal generation provided nearly all incremental gains, averaging 37 GWh/d more for Dec. 3-9 than Nov. 26-Dec. 2.

SoCal System sendout increased 400 MMcf/d week-on-week to average 2.9 Bcf/d, according to S&P Global Platts Analytics data. Similarly, PG&E on-system demand increased around 630 MMcf to average 2.8 Bcf/d.

Looking to the weekend, National Weather Service issued a winter storm watch for large swaths of Northern California for Dec. 11-14, as a cold front moves south from the Pacific Northwest.

Further temperature decreases are forecast for next week, with Los Angeles expected to see an additional 8 F week-over-week temperature drop.

Capacity restrictions, storage

The impact of colder temperatures on prices has likely been intensified by capacity restrictions on pipeline inflows and caution over storage withdrawals this early in the winter season.

Kinder Morgan's El Paso Natural Gas pipeline system extended future operating pressure reductions that have effectively removed its Line 2000 system commercial service from Black River compressor station to the California border, according to a Nov. 30 notice on the pipeline's website. The operational restrictions follow a failure on Line 2000 near Coolidge, Arizona that took place in mid-August.

El Paso Natural Gas expects the line to continue to be out of service "for several months."

With daily inflows limited by the restrictions, storage has assumed more importance in balancing gas demand on high-demand days.

Citing the heightened importance of gas storage to grid reliability on severe weather days, the California Public Utility Commission voted to increase the maximum allowable capacity at Aliso Canyon Natural Gas Storage Facility to 41 Bcf on Nov. 4. The 41 Bcf level was at the lower end of proposed capacity increases.

The Los Angeles County storage facility, which is one of the largest in the country, had its capacity capped at 34 Bcf after a major leak was discovered in October 2015.

The additional allowed capacity at Aliso Canyon increased total SoCalGas system's total nameplate capacity to 92 Bcf, although the true working limit is likely slightly lower due to the pressure-related difficulty in injecting additional molecules when storage is almost full.

As of Dec. 10, SoCalGas storage levels sat at 89.2 Bcf, down from a multiyear peak of 90 Bcf Nov. 30.

Outlook

Forecasts show the colder temperatures lingering over the next two weeks, with the National Weather Service's six- to 10-day and eight- to 14-day outlooks showing a likelihood of below-average temperatures across the West Coast states.

SoCal Border's balance-of-the-month contract traded at $7.50/MMBtu on the Intercontinental Exchange Dec. 10, suggesting market expectations that the higher prices will continue over the next several weeks. In contrast, Henry Hub's balance-of-the-month contract was trading at $3.855/MMBtu Dec. 10, with above-average forecast temperatures for the Southeast set to limit upward movement.

With these factors in mind, the basis spread between SoCal Gas city-gates and Henry Hub is on course to remain wide through the end of the month.