Short-Term Price Benchmark Trends
The ERC national average benchmark price for retail electricity increased last week by a full percentage point, landing back where it was one month ago at $0.0742 per kilowatt hour (kWh). While prices declined in Texas by 1.1% last week, prices rose in every other state, led by Maine (+2.54%) and Rhode Island (+1.92%). Most of last week’s escalation in electricity prices reflects a sharp upward swing in gas prices.
Natural gas prices spiked 11% last week, logging their biggest one-week percentage gain since April 2016. The prompt month price for natural gas closed the week at $2.871 per million British thermal units (MMBtu). A below-average storage injection last Thursday, and weather forecasts projecting above-average temperatures for the eastern two-thirds of the U.S. going into the second week of September, drove escalating natural gas prices.
Long-Term Price Benchmark Trends
The summer began with a 27% year-over-year natural gas storage surplus. Last year at this time, the total amount of injections into storage stood at 1.633 trillion cubic feet. This year, the number is only 882 billion cubic feet; a growth rate decline of 46 percent. While still sizable, the natural gas storage surplus is now about one third of what existed earlier this year.
With prices below $3.00/MMBtu, natural gas production has slowed dramatically. According to PointLogic, dry production grew by 1% last week. At the same time, net imports from Canada decreased 8%, and exports to Mexico went up 4 percent. Total U.S. consumption of natural gas fell 5 percent.
Although the presidential election will not take place until November, Hillary Clinton currently leads in the polls, which could possibly mean more regulation, higher production costs, and less output. Meanwhile, the U.S. is now shipping liquefied natural gas around the world.
Eroding natural gas surplus levels, sluggish production, extended cooling demand, and expanding exports all lobby for a continued rally in natural gas prices, with the real possibility of breaching the $3.00/MMBtu resistance level. Moreover, where natural gas prices go, so go electricity 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.