ERC Price Benchmark Trends Week Ending: October 14, 2016
After several weeks of decline, the Energy Research Council national average benchmark price for retail electricity increased 0.63% last week to $0.0742 per kilowatt hour (kWh). The biggest increase last week was in Texas, where the average benchmark price jumped 3.64 percent. During the past month, Texas electricity prices have shot up 4.18 percent. In addition, electricity prices rose notably in the District of Columbia (2.57%), and, to a lesser extent, in Maryland (1.16%).
Long-term electricity contracts (36-60 months) were favorably priced last week in Maryland, New Jersey, New York, Pennsylvania, and Texas. Long-term prices in most other deregulated markets carried a premium, compared to 12- and 24-month contract terms.
Short-Term Price Benchmark Trends
Last Thursday, natural gas (NG) futures climbed to $3.366 per million British thermal units (MMBtu), the highest price for NG since December 2014, and 100% above the March 2016 low of $1.16/MMBtu. The November 2016 NYMEX NG contract closed last week at $3.285/MMBtu, bracketed in a trading band of $3.16/MMBtu on the support side, and $3.42/MMBtu on the resistance end.
Long-Term Price Benchmark Trends
Last week’s NG price spike is definitely not attributed to near-term fundamentals. Heating demand is forecast to remain below the five-year average for all of October, based on above-normal temperatures projected for 60-65% of the country. Sluggish NG production limited injections all summer. Current estimates project future injections will continue to be below last year and the five-year average. Thus far in 2016, a total of only 1.291 trillion cubic feet of gas have flowed into stockpiles. In 2015, that number was 2.27 trillion cubic feet, more than 43% higher.
The NG rig count surged almost 12% last week (from 94 to 105), primarily in Louisiana, New Mexico, and Pennsylvania. With natural gas prices in the $3.00-$3.50/Bcf range, drilling beyond the Marcellus Shale region is beginning to become economically viable. That said, we likely will not see any real increase in production until NG prices are in the $4.00-$4.50 range; the break-even level for a majority of the producer community. We have seen a 35% upswing in drilling rig counts during the past four months, but we have yet to see any sustained uptick in production.
The latest increase in natural gas prices most likely reflects the market placing a premium on several anticipated events. First, a colder-than-normal winter (5-8% colder than normal) is forecast for most of the U.S. This will hold NG supply steady at best. High demand during the winter will likely impact NG prices, most significantly in the shoulder months of March/April 2017 when supply will be at its low ebb.
Secondly, the latest rally in natural gas comes at a time when Clinton is rising in the polls, as are many Democratic candidates for Congress. The Democratic platform contains environmental policy reforms for the energy industry. A Clinton administration, and Democratic Congress, could mean that regulations will dramatically increase the cost of producing natural gas and, subsequently, electricity. The market has a way of factoring in events that might impact prices one way or another. I suspect a hedge on a Democratic win in November is at least partly responsible for the recent rise in NG prices.
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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