The blue line in the chart depicts the spot market value of New England basis over the last 18 months. For those that are not familiar, basis is a financial term associated with the physical transportation of a commodity from a trading hub to another point. Natural gas basis is the contractual cost of delivering your natural gas to your local utility from the NYMEX natural gas trading point at Henry Hub, LA. In New England, the cost of basis can make up the largest portion of your energy bill.
The price of basis is very sensitive to cold weather. When the weather gets cold, more natural gas is needed for heating demand and more gas must be transported from the Henry Hub to your local utility. During the coldest parts of the winter, we often see the New England distribution infrastructure get constrained. These distribution constraints can drive basis rates to extremely high levels. When the price of basis increases, the cost to consume natural gas and electricity increases respectively.
The chart above compares basis pricing from last winter (left side) to the pricing from this year (right side). Last winter was the 8th coldest winter on record. Natural gas basis rates rose to new all-time highs in response to these temperatures. This year we’re seeing a very different type of winter. December through January of this year was very warm compared to the historical averages. We didn’t see any major basis price spikes over that time period. However, February is off to a much colder start. In fact, February is on track to be colder than both the historical average and last year. High heating demand over this period has begun to support higher basis pricing. We’ve seen a number of price spikes over the last week and based on the current weather models, these price spikes are likely to continue throughout the month of February and perhaps into March.