Short-Term Price Benchmark Trends
The ERC national average benchmark price for retail electricity declined again last week by almost one percent (-.88%), to $0.0713 per kilowatt hour. Prices decreased in every deregulated market, except Texas, which posted an increase of +0.21 percent. The largest drops in retail electricity prices occurred in Pennsylvania (-2.23%), and Connecticut (-2.0%). At the end of last week, the average benchmark price in Texas was still 6.43% higher than one month ago.
Spring weather may be arriving, as the weekend forecasts project a warming trend over most of the U.S., with the exception of Texas. With the arrival of warmer weather, natural gas heating demand will dissipate quickly.
Long-Term Price Benchmark Trends
Natural gas prices closed last week on the downside, with the May 2016 NYMEX contract price settling less than $2.00 at $1.99 per million British thermal units (MMBtu). From a technical perspective, the natural gas futures spot contract has been trading in a range of $2.03/MMbtu on the upper resistance end, to $1.83/MMbtu on the lower support side.
The U.S. Energy Information Administration reported Monday that working natural gas in storage as of March 31, the traditional end of the heating season, totaled 2,478 billion cubic feet (Bcf). This is 868 Bcf (54%) higher than the five-year average for the end of March, and exceeds the previous end-of-March high set in 2012. Net withdrawals during this year’s heating season, which started on November 1, 2015, were 728 Bcf lower than the five-year average, and 655 Bcf lower than withdrawals last year.
Signaling producer reactions to current market prices, and the ongoing supply/demand imbalance, dry natural gas production fell 0.2% for the week, adding to previous declines. Northeast drillers continue to show strong productivity improvements that are driving down production costs. A recent Bentek report estimates that returns on shale production are beginning to tighten as Internal Rates of Return (IRR) are below 10 percent. Nevertheless, since the beginning of 2015, a total of 46 companies in the U.S. have filed for bankruptcy protection.
From a weather perspective, summer temperatures may depend on how fast this winter’s record-setting El Nino weakens. Slow weakening could lead to a cooler summer, while fast weakening may lead to a hotter summer.
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.