Gas Price Volatility: Of Winters Past and Futures Market
to be factoring in El Niño. At the start of last winter (1996-97), storage was down, for practically all energy, including propane and oil.
"But at the start of this winter," explains Herbert, "propane and oil were much higher. By November, gas storage was soon found to be above the prior year's level. Storage was growing, relative to expected demand. Prices going into December and January were lower."
Price volatility can occur between regions as well, marked by wide fluctuations in basis (the difference in spot prices between pairs of market hubs), as explained by consultant Benjamin Schlesinger, president of Benjamin Schlesinger and Associates, of Bethesda, Md. "This past winter (1997-98), we're seeing the fairly classic pattern of western gas stuck at fairly low prices, and by that I mean the Rockies and Canada, as a result of inadequate gas transmission capacity from West to East."
In a recent study he published on the Internet, %n3%n Schlesinger describes the phenomenon of basis "brick walls," wherein a stark line will develop across a map of North America, dividing regions into areas of positive and negative basis, in which citygate prices lie above or below prices in the South Central producing area. He shows how a brick wall developed in April 1996 running roughly north-south along the Mississippi River valley. But that configuration had changed by December, after the brick wall evaporated and then reappeared along the U.S.-Canada border.
"There haven't been any basis blowouts this past winter, as we saw during the last two years. In 1996-97, for instance, we saw the "brick wall" shift and re-emerge along the northern-tier states. That reveals how you cannot predict with certainty where the next 'wall' will develop."
Herbert seconds the motion: "Energy tends to show greater volatility than other commodities and natural gas is about twice as volatile as other commodities, generally. And that volatility is more than just day-to-day, week-to-week or month-to-month. Volatility can be seen from year to year as well."
If gas price volatility is the enemy, what's the remedy? Will a solution come from more regulation to dampen price risk for consumers even though it may shut them out from potential price savings? Or, will the answer come from greater price transparency, supplied by new spot and futures markets, including even perhaps coal or electricity futures, which could allow cross-hedging between different energy inputs?
The Past Winter:
What Happened and Why
Much has been written about the price spikes that plagued natural gas markets during the 1996-97 winter heating season.
In a study released last summer, %n4%n the A.G.A. notes the irony of high prices coupled with higher-than-normal overall
temperatures: "The 1996-97 winter heating season, on a national basis, was 3.5 percent warmer than normal and 6.1 percent warmer than the preceding winter." The A.G.A. also explains how the gas industry had drawn down storage inventories the year before to the lowest level in a decade, spawning higher-than-normal demand to refill storage throughout the summer of 1996. Then, when cold weather hit in November and December, many LDCs proved reluctant to