Short-Term Price Benchmark Trends
The Energy Research Council national average benchmark price for retail electricity slightly increased last week to $0.0738 per kilowatt hour (kWh). Prices increased the most (2.0%) last week in Pennsylvania, where the average benchmark price was 0.0664/kWh. Prices decreased -1.4% last week in Connecticut to 0.0823/kWh. Massachusetts remains the deregulated market in the U.S. with the highest average benchmark price for retail electricity, 0.0978/kWh, while Texas remains the market with the lowest price, 0.0421 per kWh.
The National Oceanic and Atmospheric Administration two-week outlook forecasts above-normal temperatures for almost all of the U.S., except the Northwest and New England regions. Above-normal cooling demand will likely limit natural gas storage injections going forward into summer.
Last week’s 65 billion cubic feet (Bcf) injection into natural gas inventories was significantly below consensus estimates, considerably below the 117 Bcf injection seen this time last year, and below the five-year average of 95 Bcf. Above-normal cooling demand and weakening natural gas production are prompting real reductions in natural gas supply. Last week’s year-over-year surplus declined from 32.4% to 28.5 percent. Regarding the five-year average, surplus dropped from 35% to 32.1 percent.
In response to low production, weak storage injections, and thinning surplus, last week the July 2016 NYMEX natural gas futures breached the $2.50 per million British thermal units (MMBtu) key resistance level that has been in place since April. The newly established technical trading range is $2.50-$2.72/MMBtu. Even though anticipated storage injection levels during the next several weeks are expected to be below last year’s levels, we have a significantly oversupplied market that will likely keep natural gas prices from rising too far or too fast.
Long-Term Price Benchmark Trends
Looking forward, a hot summer with plenty of cooling demand, coupled with slowing natural gas production, could significantly reduce our natural gas surplus heading into next fall. Depending on heating demand next winter, we could see natural gas prices rise quickly if production cannot be brought back online in a timely fashion.
The natural gas rig count now stands at 82, down 140 from the same time last year, and 274 rigs less than the 356 peak seen in November 2014. The producer community has experienced 47 bankruptcies during the past 24 months. Many producers are operating on debt and equity financing.
On the other side of the equation, drillers in the Marcellus and Utica regions continue to maintain production, supporting a record-breaking natural gas year-over-year production surplus of 756 Bcf. New Northeast pipelines have helped boost gas production 18%, with the Algonquin pipeline expansion expected to bring additional relief in natural gas prices in the Northeast region.
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.