ERC Price Benchmark Trends Week Ending: November 18, 2016
The national average benchmark price for a December 2016 electricity contract remained virtually unchanged last week at $0.0726 per kilowatt hour (kWh). The biggest decline in electricity prices last week occurred in Delaware (-2.3%), and to a lesser extent in the District of Columbia (-1.1%). By contrast, prices increased notably in Connecticut (1.9%) and New Jersey (1.4%).
Last week, longer term (36-60 month) contracts were more favorable than shorter term (12-14 month) contacts in Maryland, New Jersey, Ohio, and Pennsylvania.
Short Term Trend
In less than a month, NYMEX December natural gas futures have dropped $1.01 per MMBtu or 28.4%, from a high of $3.556 on October 14 to a low of $2.546 on November 9. The decline has been driven by unseasonably warm temperatures this fall and very high inventory levels
Last week, natural gas prices finally rose from $2.620/MMBtu to $2.84/MMBtu, or a rise of 8.4%, based on cooler weather. Over the next two weeks, NOAA’s weather outlook is projecting colder than normal temperatures, primarily for the eastern seaboard. Winter looks like it is finally arriving, but is quite late to the party. So far, this November has turned out to be one of the five hottest Novembers on record. Looking back, October had 161 heating days compared to a 10-year average of 257 heating days. In short, this fall has been extremely warm, resulting in lower gas prices and higher inventory levels.
Although this market is finally beginning to acquire some cold weather, sustainable advances in natural gas prices will continue to be limited by a record level of supply which will likely see further expansion this week due to the Thanksgiving holiday. Many plants will close for 4 days and as a result, industrial demand will see some significant downsizing that could limit any price upswings resulting from an onset of cold temperatures.
Long Term Trends
Total supply (and production levels) is down by about 3-3.5 bcf/day from last year’s levels despite higher potential demand. This is partially a result of a decrease in associated gas from shale oil plays, and partially a result of low natural gas prices throughout the year that have made production outside of the Marcellus and Utica shale plays uneconomical. As I have previously mentioned, prices will need to move well above the $3 level and more toward the $4/MMBtu mark before production becomes economically viable for most of the producer community.
James Moore, Ph.D., is CEO of the Energy Research Council (ERC). He has been CEO of several research companies, including TDC, a subsidiary of International Thomson; Highline Financial, a Thomson-Reuters company; and Mentis Corporation, which was acquired by Gartner Group. He has also served as Executive Director of The Global Futures Forum, an international think tank, and as Managing Director of Gartner Group’s Global Financial Services practice.
* ERC electricity price benchmarks are derived by: 1) aggregating daily matrix prices issued by many electricity suppliers across General Service tariff rate classes for each electric utility; 2) averaging each utility’s price benchmark together for a state-level benchmark; and 3) averaging state-level benchmarks across five business days to create weekly average price benchmarks, based on next month’s start date, for commercial customers with an annual usage of up to one million kWh. The high level of correlation between matrix and custom pricing makes ERC price benchmarks a reliable measure of how prices are trending, and the direction and velocity at which prices are changing week-over-week and month-over-month. This is similar to how the S&P and Dow measure the rate and direction of change in stock market prices over time.
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