APT MidC – Part Two of Two

Good Morning,

This piece is the second half of today’s post. Each week I’ll oscillate between SP15 and MidC, today its MidC.

We made a new dashboard for this report. The left-side recaps the MidC products (HL only) sorted in period ascending. In this view, we capture the first six months, followed by the next four quarters, and close with the last three Cals. The left-side is the same products but sorted on rank ascending. I’d also recommend sorting on WOW asc or desc as that will highlight the most significant moves.

In today’s report, I’ll work with the sort on period.

What more can you say? The chart is so volatile; now the heat rate’s too cheap to meter. With a very bearish weather forecast, even though it’s dry, we’d be disinclined to bet the farm on going long. Maybe on dips but doubt we see many of those. The dry weather is a cumulative driver that will impact BOM less than the other bullets. Pass.

A similar set of plots; cheap heat rates and quite rich outright price. One sharp cold snap and Dec will clear in triple digits; likewise, if Enbridge gooses up its flows to close to normal, this is going to crater. For now, there is no hint Station 4 will see pressures higher than 80%. I’d be inclined to own this and definitely wouldn’t short it.

Even with hot weather, the Northwest’s demand will climb every day off of climatology.

Over the next few weeks, our models are adding about 2000 MWs more demand to the hub. Toss in a cold anomaly, and that adder jumps to 5000 MWs. The problem with this dysfunctional market is if you wait for a confirmed cold forecast to go long you’ll miss the party – the hub will gap $25 in a day.

A safer way to play MidC is via some derivative, like a period roll. The above is Prompt to BOM (Dec-Nov). The name defines the math; First minus Second. This has been all over the map; now the heat rate is at a contract high, but we wouldn’t sell. We like the Dec more than Nov because of the 6-14 day weather forecast.

Jan screamed up, now its yawning and coincidentally parking itself on my forecast. For what we know today, these levels seem reasonable. Let’s look at the roll.

The chart appears cheap, contract low, but I’d rather have length in Dec than Jan because …

  • Dec is generally colder and has higher demand (xmas lights).
  • Odds of fixing the gas issues are higher in Jan than Dec
  • BPA is more inclined to draft in Jan than Dec

Feb looks like Jan, let’s look at the roll.

I’d rather own the Jan than the Feb, and you can short this roll at a decent level, either heat rate or price. Sell.

March has lost most of its Enbridge premium, not that it ever had much. One certainty, if the MidC fails to serve demand (gas or power), all bullets will blast off, including this one. Owning end of winter length can be a safe place to buy an option; worst case is this drops back to $26 and you lose a few bucks. If Seattle drops to the 20s in Dec and Puget turns out the lights, this will probably pop to $40 or higher.

Huge premiums to Feb, relative to March. In a panic mode, the closer in bullets will rally harder sending this roll back to the contract lows. Pass.

The Q2 isn’t cheap price-wise, though it was a few days ago. Sumas aside, there is another developing fundamental called “water” that will drive the Q2 value. At this stage, still early in the water year, you’d have to be biased long for the Q2. Prices are not that outrageous, especially from a heat rate perspective. Long.

We looked at the Q1 bullets, here is the Q roll. An early restoration of Westcoast capacities and this roll is back to $-$10.  Any kind of cold snap and more bad Westcoast news and maybe contract lows are rested. For now, Pass.

The Q3 price seems rich until you compare it to the forecast and then it seems fair value. Surely there won’t be any Sumas issues by next summer, but if we use Socal/Transwestern as our guide for the Enbridge fix we’d be sure there still would be issues, But Enbridge isn’t Socal Gas, we think Westcoast is at 100% by Q3. Still, the water year is dry and this looks cheap. Long.

Cheap, in our opinion, even in a dry year. One month out of Q2 will bear the brunt of runoff; we just don’t know which one, yet. But every month of Q3 will be bullish, water-wise. Buy.

The Q4 seems cheap relative to the forecast, the same is true with the heat rate. Length here is somewhat safe, and if there is cold, this will rally. Long.

The market doesn’t like the Q4 much, relative to the three. Buy.

I doubt that yesterday’s move is real, way too steep of a drop. Probably just an ICE settle mistake; if it is real, the Q1 seems modestly cheap relative to the forecast. But we just got long almost everywhere else. Pass.

In case you didn’t know, the carbon tax initiative in Washington State didn’t pass. It seems the market hasn’t got that message. Sell.