Short-Term Price Benchmark Trends
The ERC average national benchmark price for retail electricity dropped dramatically last week by more than one percent (1.09%) to $0.0747 per kilowatt hour. The largest price decline was again in Texas (-2.15%), followed by New York (-1.97%), and Connecticut (-1.50%). In fact, 13 restructured states experienced a marked decline in retail electricity prices last week.
Crushing heat, record-high power burn, and a smaller-than-expected storage injection helped push natural gas prices higher last Friday. In response to record-high temperatures this summer generating high levels of cooling demand, both July and August are expected to set individual monthly records for power burn this year. The warming trend that has extended over 90% of the U.S., however, is now expected to recede to 65-70% during the next couple of weeks.
From a technical perspective, the current trading range for the August 2016 spot natural gas contract is between $2.80 per million British thermal units (MMBtu) on the resistance end, and $2.65/MMBtu on the support side. With the weekend weather forecasts easing a bit, we could see the market backing off this week. If the $2.65/MMBtu support level is breached, we could see spot prices move down to the mid-$2.00/MMBtu range before any upside recovery.
Long-Term Price Benchmark Trends
Widespread expectations are for an end-of-season storage level of around 3.95 trillion cubic feet (Tcf), similar to last year’s peak, as opposed to a supply peak as large as 4.2 Tcf, which was forecast a couple of months ago. Although short of initial expectations, such a supply surplus would still comfortably meet demand, even during an exceptionally cold winter. This has shifted attention from high summer temperatures back to a high end-of-season storage level. Working gas stocks are now 3,277 billion cubic feet, which is 17% greater than the year-ago level, and 21% greater than the five-year (2011-15) average for this week.
Likely driven by anticipated end-of-summer stocks, money managers investing in natural gas increased their net short position by more than 10,000 contracts last week. The current gas surplus will likely weigh heavily on the market, and drive prices lower once the current heat wave passes. Short of a major supply disruption that curtails pipeline flows, or a major hurricane event that disrupts gas production, we will likely see natural gas futures trading in the $2.70-$2.80 zone for the next week or so.
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.