Short-Term Price Benchmark Trends
ERC’s average benchmark price for retail electricity rose slightly last week, increasing only 0.23% to $0.0750 per kilowatt hour. Texas posted the biggest price gain (+3.01%) as a result of continuing above normal temperatures and a high level of cooling demand. Texas prices are now 6.09% higher than they were this time last month. Electricity prices in the other restructured states moved only marginally last week.
With the exception of Texas, Pennsylvania, New York, Maryland, and Delaware, electricity prices for longer term contracts were significantly higher than shorter term contracts in most states last week. For example, the difference between 12 and 36 month contracts in Connecticut last week was $0.0151 per kilowatt hour.
The National Oceanic and Atmospheric Administration is forecasting hot weather to continue across the U.S. (except for the Northwest) for at least the next two weeks. Above-normal temperatures have been the primary driver for the recent increase in natural gas prices and the continued warm weather should keep upward pressure on prices.
Dispite the warm temperatures and a string of weak injections into storage, natural gas prices dropped by 6.2% week-over-week, driven down by profit taking after having increased from around $2.50 MM/btu to the $2.90 MM/btu range over the past several weeks. But as long as temperatures remain warm enough to constrict injections and chip away at the surplus, upside price risk will continue to exceed the downside risk. The sizable supply surplus pressuring lower prices will likely restrict price gains much above the $3 mark rather than force prices back below the $2.70 level.
Long-Term Price Benchmark Trends
NYMEX natural gas prices for the coming winter (Nov 16- Mar 17) have gained 20 cents (+6%) since the beginning of June as expectations for end-of-season storage inventories continue to be revised lower. AccuWeather’s long range forecast and NOAA’s 3 month forecast call for above-normal temperatures across much of the country this summer. An especially active hurricane season is also forecast after several years of marginal activity. All of this aurgues for continuing rise in both natural gas and electricity prices from their low point last March.
On the other hand, we still have a record natural gas surplus and production levels have declined only marginally. Baker Hughs reports that rig counts have finally begun to increase indicating that we are adding production capacity back into the market.
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.