Pay attention to Dawn price risk

March 2015

• Again this year, gas prices at Dawn showed considerable volatility in February and March in response to cold weather and high demand. In fact, the Dawn market seemed out of step with other major pricing points.
• This winter’s price spikes at Dawn are indicators of a locational price risk rather than a general commodity price risk.
• Gas buyers at Dawn need to keep a close eye on the changing supply/demand balance at Dawn, and be prepared to manage the price risks that affect Dawn uniquely.

For the second winter in a row, gas prices at Dawn showed considerable volatility in February and March in response to cold weather and high demand. In fact, the Dawn market seemed out of step with other major pricing points in North American gas, which largely took the February weather in stride. As Dawn increasingly becomes the key trading point for eastern Canadian buyers, this price behaviour at Dawn is important to understand and plan for.

Although February 2015 was one of the coldest on record, the price for natural gas at key trading points like Henry Hub and AECO during the month was 30 % below where it was trading prior to the start of winter. At Dawn, however, we saw daily prices spike from $3.31/GJ during the first week of the month, to over $13/GJ after Union Gas announced restrictions on withdrawing from storage to meet daily requirements on February 19, in response to updated weather forecasts indicating a continuation of cold weather. Other pricing points of significance to Ontario buyers also spiked at that time – at Niagara prices went to $12.75/GJ and at Iroquois they reached almost $21/GJ.

High daily prices in the latter part of February pushed the Dawn Daily Index for February 2015 to $5.23/GJ, about 47% higher than the Dawn index in January. The monthly index is the average of the daily prices in the month.

This price jump, while significant, was not as bad as the price jump in February 2014, when daily prices reached $30.50/GJ and the Dawn Daily Index for the month was $17.05/GJ.

The winter of 2013-14 was marked by very cold weather from start to finish, and by the time February 2014 arrived storage balances were severely stressed. During the current winter however, more moderate weather in December and January, plus robust growth in natural gas production (not to mention more cautious behaviour by major buyers) meant that storage balances were in good shape to handle the cold in February 2015.

Prices at Henry Hub hardly reacted to the cold, trading between $2.62/MMBtu and $3.22 throughout the month.

The spike in prices at Dawn and Niagara, when other key supply points hardly budged, forces us to consider factors that affected the supply/demand balance in the southern Ontario market more directly than they affected the broader market. Weather is one. One measure of winter, “heating degree days”, shows that in Ontario, this winter (November to February) was almost as cold as the same period last year – only about 1% warmer. The most significant difference between the two years was that this year the cold came mostly in February, whereas last year it was persistent from early November.

In the US, by contrast, this winter has been about 3.6% warmer than last winter for the November to February period.

The localized price spike clearly points to supply constraints in southern Ontario when demand gets high. Even with ample storage inventory, Dawn prices spiked when demand rose in late February. An unusually high price differential between two points on the gas grid points to transportation constraints that are preventing supply at a lower priced location from moving freely to a higher priced location, as it is incented to do. Spiking prices at Dawn in high demand months means that supply at Dawn is not able to increase as fast as the demand is increasing.

Gas buyers should take note, because demand at Dawn will continue to grow. Enbridge, Union Gas and Gaz Metro are all proposing service changes that will permit direct purchase customers on their systems to supply gas at Dawn that in past has been supplied at Empress. Enbridge also has plans to shift some of its Empress supply to Niagara. This will increase baseload demand for gas at Dawn and Niagara.

One could expect that with higher baseload demand at these locations, and in the absence of any incremental capacity to bring gas into these locations, prices will spike more readily when cold weather pushes demand up.

The focus of recent discussions on new pipeline capacity in the Dawn area has been on new capacity to take gas away from Dawn, rather than on capacity to get gas to Dawn. Price behaviour at Dawn points to the relevance of projects like the Nexus pipeline to bring incremental supply from the Marcellus region, around the west end of Lake Erie and into Dawn.

Price volatility and price spikes at Dawn are relevant concerns for gas buyers moving their purchase points from Empress to Dawn. They are also important to power users since prices at Dawn impact the cost of electricity from gas-fired generators, which set the price of power in Ontario under common winter demand conditions. These price spikes in what is otherwise a low-priced North American market with abundant supply are indicators of a locational price risk rather than a general commodity price risk.

Gas buyers at Dawn need to keep a close eye on the changing supply/demand balance at Dawn, and be prepared to manage the price risks that affect Dawn uniquely. Even when the gas commodity market looks benign in general terms, gas buyers may still face significant price risks at Dawn.

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