In step with recent weather forecasts and natural gas prices, ERC’s national average benchmark price for a February electricity contract declined slightly last week by half a percent, to $0.0761 per kilowatt hour (kWh). Last week, electricity prices declined most in Illinois (-1.8%), New York (-1.3%), and Massachusetts (-1.1%). In contrast with the rest of the deregulated states, electricity prices in Texas increased by 1.2% last week.
The national average benchmark price is now 3.8% higher than a month ago. Month-over-month, electricity prices are still up markedly in every state, with the most significant increases in Texas (7.4%), Maine (5.3%), and Connecticut (5.0%). Only Illinois has electricity prices that are close to where they were a month ago. Nationally, electricity prices are 3.8% higher today than this time last month.
Last week, longer term (36-60 month) contracts were more favorable than shorter term (12-14 month) contacts in Maryland, New Jersey, Ohio, Pennsylvania and Texas. The longer term 48 and 60 month contacts were most attractive compared to short 12 month contracts.
Short Term Trend
One of the reasons natural gas is the most volatile commodity traded on the NYMEX is that its price is largely driven by weather. Over the past several weeks, a frigid Polar Vortex drove temperatures well below normal for most of the country. Natural gas prices responded by hitting their high-point for the year. Now the forecast is calling for a warming trend through the second week of January, with above average temperatures extending across almost all of the US except the Northwest. In response, the January contract ended last week at $3.42/MMBtu, down a dramatic 27 cents week-over-week from the almost two-year high that was set just the week before. From a technical perspective, the January NYMEX contract for natural gas ended last week in a trading range of $3.674/MMBtu on the resistance side and $3.279/MMBtu on the support side.
Net natural gas withdrawals from storage last week topped 100 Bcf (147 Bcf) for the first time since December 2013. Working natural gas stocks total 3,806 Bcf, which is 186 Bcf more than the five-year average and 50 Bcf less than last year at this time. Working natural gas stocks fell below the five-year maximum last week for the first time since April 15, 2016.
Long Term Trends
As the Trump administration takes shape it is increasingly evident that the regulatory and compliance costs for energy production are going to be scaled way back from their current level. This should help the producer community to cover operating expenses at a lower market price for natural gas. Lower natural gas prices will in turn cut the cost of electricity production. While other factors (such as weather) will continue to impact energy prices, reducing regulatory costs will certainly stimulate production and put downward pressure on both gas and electricity prices going forward.
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.