US natural gas market reaction to the ‘Bomb Cyclone’

Cold weather led to record demand and storage withdrawals which increased US natural gas prices to over $100/MMbtu

By Jamie Brick

In early January, a winter storm popularly known as a ‘Bomb Cyclone’ combined with unusually cold weather, and caused extremely low temperatures.

This led to unprecedented levels of US natural gas demand as heating needs rose. As a result, in just a few days gas prices near New York City went from less than $3/MMbtu to over $140/MMbtu and similar price surges were experienced all along the East Coast.

The Bomb Cyclone, coupled with a persistent and brutal Arctic cold front, caused uncharacteristically cold weather to spread across the eastern half of the United States. Unlike other recent winter weather phenomena—like the Polar Vortex of 2013/14—this weather event affected more of the country and even brought snow to Florida.

As a result, demand for natural gas reached 134 bcfd, nearly 40 bcfd more than the same time last year. Record demand coupled with inadequate gas pipeline capacity, especially to the northeast, caused prices to soar.

On January 5, natural gas prices at Algonquin, near Boston, were $83/MMbtu while prices at Transco Z6, near New York City, hit $140/MMbtu. Further south at Transco Z5, spanning the Carolinas and Virginia, prices were $125/MMbtu.

Meanwhile, prices at Dominion South in western Pennsylvania were just over $4.00/MMbtu. This indicates that there was plenty of supply coming out of the Marcellus, but not enough pipeline capacity bringing that supply northeast to New York or Boston.

Exhibit 1: HDD deviations vs. spot pricing, first week of January 2018

These high prices led to three shifts in supply dynamics. First, there were record storage withdrawals of about 51 bcfd. Second, the direction of the pipe flow also changed, with lower flow west and south from the Marcellus and with less supply reaching the New York area as natural gas was consumed in the southeast before it could reach northeastern markets. Third, we saw higher LNG imports as consumers struggled to gather enough supplies to meet the demand for heating.

In January, we saw 9 LNG cargoes delivered, which is double what was delivered over the same time frame in 2017. At Cove Point Maryland, we even saw a cooldown cargo used to supply the gas market.

There were also three cargos into Canaport in Canada, four into Everett near Boston, and another to Elba Island in Georgia. This level of LNG import activity is atypical, but with prices and demand in the US soaring, LNG cargoes were diverted from other locations to meet the increased need.

Cold snaps like we saw at the beginning of January are a fact of life and will happen again. However, it is unlikely the market response will be the same.

Several pipelines such as Atlantic Coast and Penn East will come online in the next 2 years, allowing over 6 bcfd of additional low-cost Marcellus natural gas to meet the cold weather-induced demand spikes in New York and further south.

Jamie Brick is a specialist in McKinsey Energy Insights’ Houston office.