February 13, 2019 | Callie Kolbe
The California gas market stands in contrast to the rest of the US Lower 48, where nearly 11 Bcf/d of year-on-year supply growth is keeping a lid on the country’s storage deficit and sending prices under $3/MMBtu during periods of mild winter demand. In California, natural gas storage inventories remain far below average, with wintry weather and above-average withdrawals pulling levels even lower this month, and solidifying an already bullish environment for gas prices in the state.
OPIS PointLogic estimates California’s working gas storage inventory level currently stands at a five-year low, and the year-on-year deficit is expected to widen even further before the end of winter withdrawal season. By the end of February, we estimate statewide inventories will likely dip below 110 Bcf, another five-year low.
A year ago in Get the Point, we provided a detailed look at how a warm winter in California allowed the local gas market to evade supply shortfalls and price hikes even amid multiple maintenance events (Saved by Warm Weather, But Not In the Clear Yet: A Look at the California Gas Storage Market). In this issue of Get the Point, we look at how low beginning-winter inventory levels, a tighter regional market and ongoing maintenance events have created a perfect storm for a bullish environment in 2019.
The state of California includes 376 Bcf of working gas storage capacity.
Northern California accounts for most of the working gas storage service in the state. In the north, there are eight separate storage fields that can provide natural gas to the Pacific Gas & Electric (PG&E) service area. PG&E is the largest utility in the state, and can rely on nearly 103 Bcf of storage capacity, with the remaining 138 Bcf operated by four independent storage facilities.
The southern half of the state’s storage fields are operated by SoCal Gas the state’s second-largest gas utility and represent 135 Bcf of capacity over four separate fields.
The storage volume information provided in this report provides a preview of what is available in OPIS PointLogic’s storage module. This module details each storage facility across all five EIA regions and not only provides high-level summary data but also granular details on each storage facility.
Market overview: California storage levels dwindle, and more low-side risk remains as wintry weather lingers through February
Storage fields across California began the winter season with an inventory level at a five-year low due to a warmer-than-normal summer amid ongoing pipeline maintenances and restrictions. The early part of the winter season did not put pressure on those low inventories. Throughout November and December 2018, California fields used storage withdrawals sparingly, averaging withdrawal rates of just 0.8 Bcf/d, which was only 0.1 Bcf/d stronger than the prior five-year average, even as colder-than-normal weather blanketed the region at the end of December. As demand fell throughout January, withdrawal rates also fell to an average of 0.7 Bcf/d, 0.6 Bcf/d lower than the prior five-year average. California demand fell from normal winter levels to nearly 0.3 Bcf/d below-normal.
But circumstances changed recently. As another period of wintry weather has targeted the West Coast over the last week and strengthened withdrawal rates, total inventories in California are estimated to sit at roughly 135 Bcf as of February 7, a level which remains well below the prior five-year average of nearly 190 Bcf; in fact, it’s a low only surpassed by 2014.
OPIS PointLogic currently expects demand in California to average over 0.8 Bcf/d stronger than normal through mid-February as temperatures are expected to average 8 degrees Fahrenheit below normal. This adds stress to an already precarious storage situation, especially for fields in Northern California. Consequently, the remainder of this analysis will focus on that region.
PG&E core and non-core fields drive California’s year-on-year inventory deficit
PG&E core and non-core fields in Northern California entered the current winter season on November 1, 2018 at a five-year low and at more than 65 Bcf deficit to the prior year. This accounted for the entirety of the state’s deficit.
Following weak October injections, November storage withdrawals in the eight Northern California fields were significantly above the five-year average. As a result, storage inventories remained far below the prior five-year low. Throughout December and the beginning of January, storage withdrawals were not particularly robust, even as PG&E’s system experienced stronger year-on-year on-system demand as the system pulled harder on pipeline inflows from the Redwood Path to manage already low inventory.
Inventory levels fell below 100 Bcf in mid-January for the first time since February 2014 and have been pushed even lower during the recent cold snap. Since the beginning of the month, withdrawal activity has come in well above average, at just over 1 Bcf/d. As a result, inventory levels fell below 90 Bcf during the first week of February. We estimate inventory levels have now pulled below 80 Bcf as of February 11, as cold weather lingered in the region through the recent weekend and withdrawal rates soared above 1.6 Bcf/d.
The significant uptick in withdrawal activity this month has corresponded with colder temperatures in the region and significantly stronger demand, which has not been able to be met by an increase in net flows. February-to-date, PG&E’s average net system balance prior to storage activity is nearly 0.9 Bcf/d short, which is 0.7 Bcf/d shorter than the same time period last year. The balance this month also stands in stark contrast to the current season-to-date average of 0.6 Bcf/d short. Keep in mind that this winter, PG&E has balanced an average of 0.1 Bcf/d long as compared to last winter, owing to an increase of just over 0.4 Bcf/d in net flows offsetting a 0.3 Bcf/d increase in on-system demand.
PG&E has been able to rely more on pipeline inflows this winter, which created room for below-average withdrawal activity in December and early January. Specifically, cross-border pipeline flows into Northern California via the Redwood Path on PG&E’s California Gas Transmission have averaged 1.7 Bcf/d winter-to-date, which is nearly 0.4 Bcf/d higher than last winter. Higher pipeline flows can also be attributed to Ruby Pipeline, which demonstrates an inverse relationship with westbound flows and mild east demand. Mild weather throughout the country through most of December supported strong westbound flows via Ruby Pipeline and limited PG&E’s reliance on storage withdrawals.
However, during periods of high demand in the Midcontinent and eastern portions of the country (as was experienced during the end of January’s polar vortex), Ruby’s westbound volumes dwindled, causing PG&E to rely more heavily on storage to meet demand.
On top of lower westbound volumes from Ruby, inflows to the PG&E system from Canada have also been limited this year. Following the Westcoast Energy explosion in October of 2018, capacity restrictions on the Westcoast pipeline system have remained in place, limiting Canadian volumes that ultimately feed PG&E’s Redwood Path alongside Ruby. Although Canadian imports at Sumas have risen as high as 0.9 Bcf/d on certain days, the level remains 0.2 Bcf/d below pre-outage volumes. Capacity restrictions are expected to continue throughout February, with forecasted capacity reduced by nearly 0.3 Bcf/d from February 13-19. The limited flows via pipeline into Northern California have forced strong storage withdrawals to take over and meet demand this February, adding fuel to an already fiery storage situation.
All of this inventory and flow activity ultimately is represented in prices. With lower levels of storage inventory, Malin city-gate, PG&E city-gate and Opal are three key hubs which have remained elevated. Strong demand through February, combined with the low storage inventories, has supported both Malin and PG&E city-gate prices even at levels above Opal -- and during cold snaps in the east, this is important to keep westbound volumes flowing into Northern California.
Stay up to date by following OPIS PointLogic’s Gas Week Rockies/West report, where we track production, demand, storage, pricing, news and analysis of this dynamic regional market. As California inventory levels move even lower, we’ll track just how bullish this western market could become.