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Houston — While natural gas markets across the US have exhibited notable, demand-driven upside in late July and early August, the most significant of these fluctuations has been in California, where sweltering temperatures and seemingly perpetual pipeline maintenance sent both financial and physical gas contracts to new records.

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Spot prices at SoCal Gas city-gates over the past two weeks have averaged $16.50/MMBtu, the highest two-week period recorded since Platts began assessing the SoCal city-gates in September 2008.

Cash markets during this period at SoCal breached the $20/MMBtu mark three times, a level never reached before July 23, when they set an all-time record of $39.52/MMBtu.

Behind the pricing surge has been scorching temperatures, with California and the broader Southwest seeing a total of 128 cooling degree days during the first nine days of August, compared to a five-year average of 312 CDDs for the entire month of August.

While these weather dynamics bolstered power burn across the region, the real fuel behind the price rally has been ongoing maintenance across the Southern California gas system, where planned and unplanned maintenance events have led to record price spikes.

The most notable among these occurred August 3, when SoCal city-gate saw its balance-of-the-month swing swap change hands at $24.25/MMBtu on the Intercontinental Exchange during early morning trading, a whopping $16/MMBtu stronger than the August index, which settled just two days prior and was already the highest SoCal city-gate monthly index on record by a margin of nearly $3.

By the end of trading, the SoCal city-gate balance-of-the-month swing swap settled at $21/MMBtu, an all-time record settlement for the contract.

Driving the volatility was an announcement posted by SoCal Gas that morning stating it would be limiting capacity at the PG&E Wheeler Ridge interconnect August 14-17 by 150 MMcf/d. That maintenance announcement was the most recent in a series of maintenance actions on the pipeline, with SoCal undertaking maintenance at North Wheeler Ridge August 7-8. More recently, SoCal Gas announced an unplanned maintenance on August 8, also at Wheeler Ridge, which would reduce flow by 535 MMcf/d to just 103 MMcf/d. All three maintenance events will impact southbound flows through the Wheeler Ridge zone, specifically receipts from PG&E

OFFSETTING REDUCTIONS LIMITED

While the volumes impacted may appear minimal, SoCal's ability to offset the reduction in flows by increasing receipts from Kern River Gas Transmission, which also has an interconnect at Wheeler Ridge, are limited given KRGT has been flowing full to the Southwest, which allows for little room for extra volumes to be delivered into SoCal, exacerbating the bullish impact of the maintenance.

Looking past these scheduled maintenances, fundamentals and market action suggest the price peak may be in the rear view, with West demand through the third week of August forecast to average 10.7 Bcf/d, compared to an average of 11.2 Bcf/d during the first nine days of August, S&P Global Platts Analytics data shows.

Financial contracts reflect the downside impact of these projections, with SoCal city-gates balance-of-the-month trading at an average of $11.90/MMBtu August 7-9.

From a broader perspective, the US Energy Information Administration announced a storage build of 46 Bcf across the US, bringing total stocks to 2.354 Tcf for the week ending August 3. Total stocks are 671 Bcf less than inventories one year ago and 671 Bcf less than the five-year historical average.

As supply concerns deepen, the market has strengthened, with the NYMEX front-month contract gaining 22 cents in the last 14 trading sessions, to trade around $2.95/MMBtu.

Looking forward, the NYMEX contracts for December through March are all trading above the $3/MMBtu price mark, reflecting expectations for tighter markets throughout winter. On Thursday, the NYMEX Winter Strip was trading at around $3.077/MMBtu.

--Samer Mosis, samer.mosis@spglobal.com

--Arsalan Syed, arsalan.syed@spglobal.com

--Edited by Rocco Canonica, rocco.canonica@spglobal.com