Gas Storage Model – Predicting $1/mmbtu Weather Risk

Gas Storage Model – Predicting $1/mmbtu Weather Risk

A new tool is added to the PMA package – an interactive gas storage model.   The gas storage model value lies in the set of 35+ pre-set runs for the power sector enabling the user to create their own version of the future without having to wait.   AEC specialty lies in the power modeling world.   With this in mind the model allows users to change their assumptions in the other areas of the gas balance (e.g. production, imports, demand outside power sector, etc.).

A demo version is available http://allenergyconsulting.com/Data/DemoGasStorage.php . The demo gives the user all the capabilities other than changing the prices for Henry hub in the months of Jun-October.  An example of using the tool is described below.

Recently the EIA did their own analysis of the end of summer inventory.  In their analysis, they conclude ending  storage level will be 3.4 TCF lower than the 5 year average of 3.8 TCF.  To test our model, we used their assumptions outside the power sector.  EIA assumed production only grew 3% from 2013.  To put that into perspective, the 5 year average is closer to 3.8% and this was during very low price signals.  EIA used imports that are much higher than the recent trend with an increase of 2.7%.  5 year average imports have declined by 15%. We also incorporated their price forecast – see below image.

Gas Storage Model Input (Click to Enlarge)

 

Using the 10 year average weather, our models show the final storage numbers closer to 3.6 TCF using all the assumptions.  This was expected given the general under-estimation of the power sector to respond to significant rise in gas prices.

Gas Storage Model Output (Click to Enlarge)

Another use for the model is to create your own gas price forecast by targeting a storage number.  As an example, if we changed the weather to be an extremely hot summer, we can change the weather drop down to 2010 per our 10 year weather analysis report.

In this case, we had to change the gas prices in order to maintain a 3.5TCF ending inventory.  The gas price that solved for this was $5/mmbtu.  One can put even more finesse into the forecast by adding more seasonality than what was shown.  In addition modifying the non-power demand would be a prudent task.

Gas Storage 2010 Weather Scenario (Click to Enlarge)

 

The opposite of 2010 would be 2009 weather.  Applying the same technique and target of 3.5 TCF, we get a price level of $3.8/mmbtu.

Gas Storage 2009 Weather Scenario (Click to Enlarge)

Rather quickly, we now understand the weather risk involved in gas can amount to over $1/mmbtu.

The model does require updates since each week there is an update to the storage number.  In addition, the relationships were established based on the April 22nd 2014 market prices.  We plan to update the relationships monthly.  The coming update for the model will include enhanced basis control plus be expanded to cover to the end of March of next year.

 

Besides the gas model, PMA subscribers get the daily files, and the study files.   In addition, prime members receive-at no additional cost reports such as the the Summer 2014 Outlook report  and the 10 year weather analysis.  Subscribers also have the opportunity for free private consultations.  Discussions can range from answering more detailed questions on the studies to discussing potential scenarios of the future.

Please contact me to schedule an online demo meeting dkb@allenergyconsulting.com or 614-356-0484

We are focused not only on supplying answers, but empowering you to find answers.

Your Inspired Energy Consultant,

 

David

 

David K. Bellman
Founder & Principal
All Energy Consulting LLC
“Independent analysis and opinions without a bias.”
614-356-0484
dkb@allenergyconsulting.com
blog:  http://allenergyconsulting.com/blog/category/market-insights/

 

Sell Winter PJM-West? Trading & Risk Product

Sell Winter PJM-West?  Trading & Risk Product

A common question is how can I use PMA in my organization?  There are multiple ways PMA can help your organization including enhancing all focus on the gas, coal, and power markets.  PMA can increase your fundamental understanding in the gas, coal, markets.  PMA can help you evaluate generation assets and portfolios.  PMA can also be used to evaluate risk and trading opportunities.  In the following example, we will describe a simple case of how PMA can deliver a potential trading opportunity and be used to evaluate risk and reward.

With the new online interface, one can quickly get an assessment of the model in relationship to the forward curve.  PMA runs every day with the latest futures markets prices for natural gas and coal.   Three scenarios are run each day – Base, High Power Price, and Low Power Price case.   The Base uses a normalized weather based on 2003-2013.  The high uses the 2010 weather pattern, and the low uses the 2009 weather pattern.  The selection of these years are based on our 10 year weather analysis just completed a few weeks ago.  The high and low also changes henry hub and retirement and builds plus forced outages – a complete description of the cases are available for our subscribers.

The following are direct screen shots from our latest online interface for the April 29th runs.  Three lines are presented.  The yellow solid line represents the forward curve.  The blue solid line represents the model output.   The dash red line represents the historical tendency of the model from our 4 year calibration run by month.  In the example below, the model has a tendency to under-forecast the shoulder months- therefore the dash red line above the blue line.

Base Case (click image to enlarge)

In the Base Case, we can identify that this year summer and winter could be a potential sell given both red and blue line below the futures curve.

High Case (click image to enlarge)

In the High Case, the summer sell is not looking too good.   If the summer temperatures are to be similar to 2010, and gas prices move up 50 cents and planned new builds fail to perform or deliver as expected, PJM West summer prices can blow up leaving the sell summer trade losing over $30/MWh in July.   However, the winter trade shows a rather smaller worse case scenario of $5/MWh in January.

Low Case (click image to enlarge)


The Low Case represents the potential reward of the sell trade.  In the summer, the potential gain in the sell trade is around $12/MWh for July.  This is the same spread seen for the winter sell trade for January.

Clearly, the risk and reward view would point to the winter trade over the summer trade.  I would suggest a few more next steps before exercising the winter trade.   Potentially, I would identify a spread to be long to balance mitigating against any major catastrophic event such as major gas pipeline issue.  This spread can come in the form of ON-OFF peak spread, location spread, to a heat rate trade.  To identify the other side, one can easily research that by using the drop down menus and following the same analysis above.  Another step I would take is to run additional price, weather, and outage scenarios.   PMA subscribers have complete access to all this.

Besides the easy to use online interface, PMA subscribers get full access to the data files.  PMA subscribers get the online access, the daily files, and the study files.   In addition, prime members receive-at no additional cost reports such as presented above, the Summer 2014 Outlook report , the recent briefing on what is causing the gas demand drop, and where it is coming from.  Subscribers also have the opportunity for free private consultations.  Discussions can range from answering more detailed questions on the studies to discussing potential scenarios of the future.

A demo of the daily file is available with restricted viewing.  Click here to download.  Please contact me to schedule an online demo meetingdkb@allenergyconsulting.com or 614-356-0484

We are focused not only on supplying answers, but empowering you to find answers.

Your Inspired Energy Consultant,

David


David K. Bellman
Founder & Principal
All Energy Consulting LLC
“Independent analysis and opinions without a bias.”
614-356-0484
dkb@allenergyconsulting.com
blog: http://allenergyconsulting.com/blog/category/market-insights/