Blog July 24, 2018

SoCal Citygate prices blasted to new record highs as another unique confluence of cross-commodity events hits the market.

Natural Gas Intelligence (NGI) price data shows Monday's, July 23, 2018, SoCal Citygate cash picked up more than $25 from Friday, July 20, to reach $39.31, putting basis at $36.60. This comes just days after new summer-to-date highs were established. The new all-time highs for both cash and basis come in more than double the previous highs set this past February. 

SoCal reported the system-weighted average temperature yesterday was 85°F. Daytime highs in downtown Los Angeles reached 85°F; Burbank topped 98°F; and Riverside hit 105°F. The heat is forecast to significantly intensify in coming days and remain elevated through next week buoyed by the same upper-level high-pressure system which brought record power demand to ERCOT. This high-pressure system brought more than just heat to SoCal, and is positioned over the Four Corners allowing for elevated dew points in the LA basin, giving an extra cooling load punch. If it weren't for cooler conditions in the San Francisco Bay area, record power demand would've likely verified in the July 25-26 timeframe.

Socal degree day outlook

Evening cycle nominated demand for the SoCal system today (Tuesday, July 23) is up to a summer-to-date high of 3,105 MMcf/d. While this is just the third day this summer, SoCal demand crested the 3 Bcf/d mark, and we saw much higher individual demand days in previous summers. The demand lift is the primary driver of prices due to constraints getting gas into the market, as well as power-side issues. Because of the system tightness, SoCal Gas issued system-wide curtailment watches, warning of the chance that customers may have to reduce their gas consumption if conditions get too tight. 

Heat and tight supply issues are boosting demand across Southern California. With load up across the surrounding balancing authority areas in both the northwest and southwest, imports into the state are down nearly 40 percent relative to week ending July 20, 2018. Additionally, reliability concerns limit the amount of power that can import into the LA Basin, resulting in more gas demand at less efficient units along the coast. Collectively, neighboring load strength and local reliability concerns force generation to move to within the SoCal market, further boosting gas demand.

This trend is likely to continue as power loads are forecast to remain elevated. Genscape’s WECC power analysts hourly load forecast for SoCal Edison and San Diego Gas & Electric is showing sustained growth through Thursday, July 26. Peak hourly combined loads are forecast to climb to 27.76 GW today and 28.22 GW tomorrow. 

hourly load forecast day over day

The ongoing growth of renewables is one potentially limiting factor on the stress on gas-fired generation. While CAISO hydro is coming in lower this summer, the losses are overwhelmingly outweighed by increased solar PV and wind generation. Across the CAISO, hydro output this summer-to-date is coming in about 35 percent below last summer-to-date (although it is only coming in about 5 percent below the prior 10-year average). Summer-on-summer hydro generation is down about 37 GWh/d, but solar PV generation is up nearly 40 GWh/d and wind output is up 13.5 GWh/d.

The spike in demand comes amid ongoing challenges feeding gas into the SoCal market. SoCal’s access to the Aliso Canyon storage facility– it’s largest –remains restricted, placing pressure on the remaining storage facilities and imported gas via pipelines. SoCal has withdrawn gas: four of SoCal’s eleven withdraw days this summer came in the week ending July 20, including the two largest of the total. So far this summer they have reportedly pulled out about 2.43 Bcf/d, which is quite a bit less than normal for this time of year, though slightly more than they used at this point last summer. Nonetheless, this leaves system-wide inventories just a notch above 66.1 Bcf. While this is about 11 Bcf greater than this time last summer due to SoCal’s authorization to increase injections, it is more than 49.6 Bcf below the normal five-year average. As a result, any pulls on the system – particularly at this relatively early point in the SoCal summer – will be supportive of forward prices.

Gas pipeline imports are more or less maxed out. Northern Zone flows have been limited since SoCal’s Line 3000 went out of service since mid-2016, which cut about 540 MMcf/d of capacity. Further cuts occurred after SoCal’s Line 235-2 suffered an explosion in October 2017 and has yet to be restored. This reduced imports through the Needles point by nearly 800 MMcf/d.

Southern California gas import zone flows, capacities and demand

Additional supplies are coming into SoCal from Mexico via Mexico’s Costa Azul LNG. SoCal imported nearly 0.5 Bcf over the last nine consecutive days, including a summer-to-date single-day high of 107 MMcf/d last week. With the Costa Azul volumes being some of the most expensive molecules in the market, these imports further elevate SoCal’s prints.

SoCal Citygate Imports from Mexico Costa Azul LNG

The strong pull from demand markets upstream of SoCal also places stress flowing supply into SoCal. Demand is strong in the Desert Southwest, western Mexico, Northern California, Pacific Northwest, and West Texas. All of these markets have the ability to siphon off gas before it can get to SoCal. For example, late last week, Baja Path – which flows gas to SoCal from PG&E in Northern California – flows declined about 65 MMcf/d below the previous 30-day average as PG&E held gas back up north. Indicative of the strong demand, upstream systems including PG&E, Kern, Southwest Gas, and El Paso all posted notices warning of stressed operating conditions. SoCal must print a premium price if it is to ensure molecules make it past those upstream demand markets and to SoCal. 

SoCal Natural Gas Imports from PG&E's Baja Path Day over Day

With temperatures forecast to rise and stay elevated, we expect prices to remain elevated but extremely volatile. It is possible prices may retreat from highs on July 23, 2018 even if demand remains strong should any strained component in the gas and power system gain relief. 

To track these and other market events please see Genscape's Daily Natural Gas Basis Commentary, California Basis report, and Genscape's CAISO Power IQ platform.