Resilient?

Good Morning,

Spot gas rallied strong everywhere but PG&E:

001-spot-gas

Perhaps the rally is off of Socal Gas’s request to resume injections into Aliso Canyon? This political hot potato is  far from being a done deal but the utiltiy believes it has complied with all of the state’s requirements so no one should be surprised if injections resume this winter. Call that bullish for SP and bearish for the spread (PG&E – Socal).

Despite the meltdown in gas, and despite the deluge of rain, heat rates have been surprisingly resilient through this bearish of times:

001-spot-heatrate

If there was ever going to be a total collapse of the western power markets it should be happening right now, loads are at calendar year lows and the northwest is awash in water, but that hasn’t happened. The above chart plots the last 30 days of spot heat rates and mostly they are within the 30 day range. In other words, hedged length has not done poorly over the last week; naked length (i.e. long gas) has been destroyed, but that happens when power traders start thinking they are gas traders.

Our outlook, going forward, is increasingly more bullish for the northwest … read on.


Mid-C

For starters the trend for dryer weather is still in play:

001-prec-hub

Everywhere but the Rockies is below normal, the Mid-C is about 40% below the typical 10-day cumulative precip. That is important because if the trend continues you can expect the hub to shed a few thousand MWs of hydro energy over the next couple of weeks. While that is happening you can expect the hub to add a few thousand MWs of load as temperatures attempt to revert back to normal. We aren’t talking cold to get those 2000 MWs of new load, all the hub has to do is shake off these 10 degree positive anomalies it has been realizing:

Mid-C Composite Temperature Outlook

001-wx-mcn

And that is exactly what is happening ,where today there is a 12 degree anomaly next week there is an 8 and two weeks out there is a 1 degree anomaly.  All of that cooling will drive an additional 500-1000 aMW of load increases each week for the next eight weeks:

001-forecast-loads

It isn’t a question of “If”, just a question of “When”. Well, we know it hasn’t been in the last few weeks, just check out the degree day anomalies for the first three days of November:

001-degday-mc

Ouch, that is some serious bearish realized weather; toss in big flows and you’d think the Mid-C would be a train wreck but look back at those heat rates – 8500 – and you realize it is surprisingly resilient. Much of that resiliency can be attributed to strong exports to California:

001-transflows-ac 001-transflows-dc

Pretty much all of the northwest gas is just being sent south. We noted BCH is back to its selling ways:

001-transflows-bc

Powerex is offsetting about half of the DC exports, but we think that is bullish since, incrementally, there is only another 1000 MW they can push into the Mid-C.  Just need some load.

We mentioned it is drying out, so how much snow did the hub capture during these record rains?

001-hydro-snow

Not a lot; there isn’t a basin in the northwest that is even normal, let alone above normal. Contrast today’s anomaly with two weeks ago and you get our point that October anomalies are irrelevant, ignore them, and you can ignore today’s anomaly. One good snow storm and those go big positive; the correlation between a current anomaly and the end of the snow season anomaly remains very low until Mid-December. And the anomaly today is bullish, even the folks in Portland are re-assessing their water supply outlook:

001-water-supply

The Jan-Jul at TDA is off 5% in a week, the Canadian outlook is off 3-4%; that trend will continue with the drying conditions but once the hub returns to normal temperatures snow will start building again.

Flows at BON seem a bit bizarre:

001-hydro-bon

Peak discharge is occurring in the off-peak, which is also when BPA is spilling water. Clearly, this is a stratagem designed to support prices, an action the rest of us would go to prison if we attempted it.

 


SP15

Loads in Socal are sideways:

001-loads-sp

But there remains more pain for SP, not a lot, but average on peak demand will continue to fall another 500 aMW over the next couple of weeks:

001-forecast-loads-sp

Which is really just noise, one gas plant coming off line for maintenance will absorb that impact. Meanwhile the hub will see some unseasonably warm weather for the next week:

001-wx-bur

And that warm weather will only mean that when it ends the drop to the lows will be that much harsher.  A few new SP gas units came off line:

001-iso-newout

Also we noted that Dynegy has tossed in the towel on Moss Landing 6&7, two high heat rate plants inside ZP, that have a total nameplate of 1400 MW. Doubt we see any impact on the market this winter but that capacity will be missed during next summer’s very hot days.

Noms remain relatlively strong inside SP:

001-noms-sp

Even with the recent spike in SP gas plant outages there are more to come:

001-iso-out-sp-gas

Perhaps another 500 MW, on average, of gas capacity should be expected off line over the new few weeks. Following those November outages most units will be returned to meet December peak loads then a new wave of outages will begin in February.

Much of what we didn’t like about SP a few weeks ago has now been absorbed into the price:  Return of the DC, loss of the cooling load, and strong stream flows. Now with a hint that Aliso might start injecting we are becoming more enamored with SP length.


Palo

The inevitable destruction of loads is now taking place:

001-loads-pv

Temperatures continue to come off, though remain above normal:

001-wx-phx

But that won’t last past next week and then loads will hit the bottom but won’t stay there long:

001-forecast-loads-pv

Unlike SP which troughs out for several weeks, Palo bits bottom for a few days then rallies into heating season. But around this time the hub gets its nuke back which will offset most of that load rally which is why our price forecast is going nowhere for all of BOM:

001-forecast-price-pv


Conclusions

  • BOM
    • Mid-C
      • 001-traderank-bom-midc
      • The market has sold this hard, too hard in our opinion, and we’d remain long, go longer in fact, off of: cooling temperatures, dryish 10 day, declining sideflows, and strengthening gas (?), but more than any other reason … it is cheap.
    • SP15
      • 001-traderank-bom-sp
      • Like the Mid-C, SP is cheap, most of the fundamental pain from a few weeks back (DC returning, declining loads, strong streamflows) has been absorbed into the price. Looking forward there will still be some declining loads but we suspect most of that will be offset by new outages. As such we cannot support a short position and we are … .Long
    • Palo
      • 001-traderank-bom-pv
      • Like everywhere, BOM Palo is cheap, but there is not as much upside here as there is elsewhere and we’re already long Mid-C and SP, so have no choice but to be …. Flat
  • Dec-BOM Rolls
    • MidC
      • 001-traderank-dec-bom-mc
      • Short the roll
    • SP15
      • 001-traderank-dec-bom-sp
      • Short the roll, market has blown this out way too wide.