The $3 Threshold

NYMEX Rallies Past $3

Hot weather, a bullish storage projection, and power outages across the country caused the NYMEX August gas futures contract to jump over 17 cents Wednesday, briefly surpassing $3/MMBtu, but eventually settling at $2.973/MMBtu.

After settling at $2.999/MMBtu yesterday, the August gas futures contract is currently trading at $3.04/MMBtu. By comparison, the 12 month strip is trading at $3.38/MMBtu and next year's winter strip (Nov 12 - Mar 13) is trading at $3.45/MMBtu.

The $3 Threshold

$3.00/MMBtu has been referred to by many analysts as the threshold of where natural gas will be more profitable than coal in terms of electric generation. If it's below $3, burn NG, if it rises above, burn coal.

The reality is not that simple however, as the profitability of coal is dependent upon multiple factors such as the geographic location and efficiency of the plant.

According the research by BNP Paribas, "natural gas prices will have to rise markedly from current levels before we witness a negative impact of electric power demand."

BNPP also stated that "at best, only 37% of US coal plants would operate if gas prices remained at or below $3/MMBtu. If prices rise to $4, then two-thirds of installed coal capacity would theoretically operate at a profit."

However, further increases in prompt month pricing are unlikely as the market does not embrace the idea that a storage overload will be prevented with an increase in power demand, likely capping the price at or below $3 until the heating season begins.

Another Dismal Storage Injection

Working gas in storage was 3,163 Bcf as of Friday, July 13, 2012, according to EIA estimates. This represents a net increase of 28 Bcf from the previous week.

Stocks dropped to 509 Bcf higher than last year at this time and 470 Bcf above the 5-year average.

The build this summer is projected to be just 1.4 Tcf, the smallest in over two decades.

"Cooler" Weather Coming Soon

Temperatures in the Buffalo/Niagara region are expected to be a little cooler this weekend than they have been recently, however we will still see highs about 4-6 degrees above average.