The outlook for natural gas supplies into the New York City heating market is expected to be much improved this winter compared to last season with more than 18 billion cubic feet per day (Bcf/d) of natural gas being transported from the Marcellus Shale into the city, but the market could still be susceptible to price spikes, according to a new report from Morningstar Commodities Research.

“We believe there is upside risk to Transcontinental Zone 6 New York at current winter prices of unsolved constraints moving gas to New York City,” the company said in its “Northeastern Winter Gas Outlook.”

“The Marcellus and Utica shales will be producing about 4 Bcf/d more supply this winter than last winter, which should ensure gas availability in the East. But pipelines moving gas into the New York City area remain constrained despite a few incremental expansions moving gas east from the Marcellus,” the report said, citing Spectra Energy Corp.’s TEAM 2014 and The Williams Cos. Inc.’s Northeast Connector projects.

New York City has three main sources of gas demand: residential and commercial, electric and steam. The largest demand source is for residential and commercial with 9,921 megawatts (MW) of electric demand in the city, but only 3,909 MW use gas as their primary fuel, which equates to 1.031 million cubic feet per day (MMcf/d) on peak winter days, according to Morningstar .

LNG supplies will help to meet supply gaps on peak demand days, but LNG facilities in the region only have the capacity for 10 to 15 days of supply with about 3.2 Bcf of storage capacity in the Con Edison and National Grid territories. This LNG can be vaporized at a rate of 691 MMcf/d. A further 2 Bcf of LNG storage is available in Carlstadt, N.J., and can be vaporized at 400 MMcf/d.

“These facilities are very important during high-demand periods and are utilized only about 10 days a year. This supply can be vaporized at a rate of 1.024 Bcf/d. If vaporized at that rate, LNG tanks would be empty after just five days, but we assume that withdrawal rates are not being fully utilized and that there is enough supply for 10 to 15 high-demand days in the winter, with withdrawal rates at 400 MMcf/d,” the report said.

These tanks take 200 days to refill due to very slow liquefaction and injection rates of 10 MMcf/d to 20 MMcf/d, which makes sustained cold fronts more troublesome to the gas value chain in the city during the winter as supplies are limited to pipeline deliveries once the initial LNG supplies are burned through. “More gas supply is likely [to] be available on a cold day in early January than a cold day in February,” according to Morningstar. Further LNG storage is barred from being built in the area due to legislation crafted after an LNG storage explosion on Staten Island more than 40 years ago, which further heightens the need for pipeline capacity to meet increased demand.

In addition, demand in New York City is expected to increase by at least 100 MMcf/d due to more than 1,000 buildings in New York City converting from heating oil to natural gas, biofuel or steam this year.

Morningstar also has concerns over bottlenecks at Transco-Leidy’s stations 515 and 517 while Williams’ Rockaway Lateral, scheduled to complete construction in first-quarter 2015, is expected to deliver more than 100 MMcf/d of supplies because of the completion of the Northeast Connector.

Aside from the threat of a sustained cold front, the outlook for gas prices in the city is more positive from a consumer perspective as the report anticipates lower prices due to new capacity.

“We are still bearish TETCO-M3 and Transco-Z6 Non-NY at current winter prices because we believe the additional 4 Bcf/d of incremental supply out of the Marcellus will relieve these basis points this winter. Deliveries along TETCO-M3 are particularly exposed to downside price risk when New York City is sufficiently supplied,” the report said.

In total, there are four major interstate pipelines—Texas Eastern, Tennessee Gas, Transcontinental and Iroquois—transporting up to 4.364 Bcf/d gas into the region through 10 entry points. “Approximately 3.279 Bcf/d of this capacity has firm contracts into the city, with the remaining capacity being used for interruptible gas generators and incremental local distribution company demand,” Morningstar said.

While storage levels reached a five-year low of 822 Bcf at the end of the winter heating season, a mild winter coupled with increased Marcellus production helped to rebuild storage. According to the report, this will still leave levels at or near the five-year minimum, which should be ample given a normal winter.