Based on the events of the last two weeks, it looks like the Winter of 2013-2014 is going to be a wild ride in New England. You're probably tired of hearing this by now, but natural gas pipeline constraints coupled with an electric grid reliant on natural gas results in scarcity and high prices on the coldest days when space heating load and electric generators are competing for the same supplies. Last winter, there were several days where the spot price of natural gas exceeded the cost of Nos. 2 and 6 fuel oil and we discussed that in a prior blog post. For customers with dual fuel capabilities, it was actually more economic to burn oil than natural gas on many days and we expect that to be the case this winter as well.
The graph below shows natural gas spot prices on several major pipelines serving the Northeast U.S. The most important feature in this graph is that all of the New England delivery points spiked in the last few days, while prices west of the Hudson River were much more subdued. This bifurcation of Northeastern gas markets is a recent development and is largely driven by the increase in gas supplies from the Marcellus which can reach the mid-Atlantic, New York, and southern Ontario, but just can't seem to get into New England in sufficient volumes.
Fuel oil is a little different from natural gas in that the daily spot price matters less than the price you paid the day you filled your tank. As a result, its possible to have a static strike price for switching from gas to oil. As an interuptible gas customer, its possible that the utility will make the decision for you on certain tight days, but there will be other days that present an economic arbitrage opportunity even if the utility does not have to activate curtailments. The table below shows fuel oil prices at common delivery points/terminals as reported by the Oil Price Information Service (OPIS) on 12/6/2013.
Although No. 6 Fuel Oil is getting rarer and rarer these days, it will likely be economic to burn many days this winter. The same will be true of No. 4 fuel oil. No. 2 fuel oil is pretty expensive and we've made some estimates to convert the quoted wholesale prices into retail prices in $/MMBTU. As a result, the actual delivered price to your tank will vary based on your fuel oil vendor, delivery size, and your specific location. Despite the price of No. 2, we estimate that there will be a few days this winter where natural gas spot prices in New England will exceed $30/MMBTU. If your natural gas supplier cashes you out daily (Sprague, Hess, Global, and Shell offer this), then you can cash in on your flexibility by reselling your Daily Contract Quantity (DCQ) at the prevailing spot price if you have a fixed price DCQ or just avoid high prices if you are on an index. You'll also do your gas supplier a huge favor as your dual fuel capabilities represent a physical hedge in their portfolio. In order for this to work, you'll need to ensure that you have frequent communications with your natural gas supplier as they would need to provide you with price data.
If you have dual fuel capabilities and need to review your utility's interuptible program or determine a strategy, call us. We've worked with dual fuel customers throughout the U.S.