Short-Term Price Benchmark Trends
With natural gas prices falling to a new three-year low at the end of last week, ERC’s benchmark price for retail electricity declined again for the fifth week in a row to a national average of $0.0768 per kilowatt hour. Although the overall price decline was not substantial (only -0.15 percent), the benchmark price did drop notably in New York (-2.41 percent) and Ohio (-2.24 percent). Bucking the downward trend, benchmark prices for electricity rose last week in Illinois (+3.48 percent), Texas (+3.31 percent) and Delaware (+0.87 percent).
Although cooler than normal temperatures in the eastern US will probably limit this week’s injection of natural gas into storage to an average level for this time of year, continued strong production and warmer than normal temperatures now forecast into November will likely increase storage levels for the remainder of the fall. Declining rig counts (due to a glutted oil market) will have only a limited impact on gas production due to enhanced drilling efficiency and expanded east coast pipeline capacity.
The long-term forecast of a relatively mild winter driven by a strong El Niño continues to depress the pricing curve for longer-term (36/48/60 month) contracts. Pricing for longer-term contracts was most favorable last week in the District of Columbia, Illinois, Maryland, Pennsylvania and Texas.
So with record storage levels, strong natural gas production and forecasts of a mild winter all creating downward pressure electricity prices, only the seasonal uptick in prices we generally see in November/December is likely to provide sufficient support to stabilize pricing in the current trading range.
Long-Term Price Benchmark Trends
A significant proportion of our natural gas production comes as a bi-product of oil drilling. The latest Baker Hughes rig count shows US oil rigs have declined to 595, the lowest level since July 2010. Over the past year, the number of US oil rigs operating has fallen by an average of 20 a week. Natural gas rigs were also down by six last week, to only 189 operating rigs.
Even though domestic oil production is likely to decline further due to depressed prices and rig closings, global oil surplus is significantly higher than the decline so far in domestic production. As such, a more balanced relationship between supply and demand (and support for higher prices) will need to come from supply cuts in other parts of the world. So far, OPEC has provided no indication of backing off current production levels. And with additional oil likely to flow from Iran in the next several months, excess surplus and depressed domestic oil production are expected to continue for the foreseeable future.
Jim Moore, PhD, is president of the Energy Research Council. ERC manages a portfolio of primary research programs and databases that evaluate energy prices, procurement practices and management strategies.
Jim 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.
*The weekly average price benchmarks are derived from a standardized database of daily matrix prices issued by many electricity suppliers. The database is updated every business day and includes prices issued from September 2013 forward. The benchmarks are derived by aggregating individual supplier prices across the General Service tariff rate classes for each electric utility, and then averaging the utility price benchmarks together for a state level benchmark. Finally, these state level benchmarks are averaged across the five business days of each week to create the weekly average price benchmarks by state. These benchmarks reflect the average prices for General Service tariff rate classes by utility and state, based on next month’s start date. As mentioned, these benchmarks are based on matrix prices for commercial customers with an annual usage of up to 1 million kWh. While they are not a valid measure of pricing for larger C&I customers, the high level of correlation between matrix and custom pricing make the benchmarks a reliable measure of how prices are trending, as well as the direction and velocity at which prices are changing week-over-week and month-over-month. This is similar to how the S&P or Dow measures the rate and direction of change in stock market prices over time.