Short-Term Price Benchmark Trends
The ERC national average benchmark price for retail electricity increased last week by 0.7%, to $0.0750 per kilowatt hour (kWh). Prices increased in every deregulated market in the U.S. The markets with the lowest average benchmark price for retail electricity are Texas ($0.0424/kWh) and Ohio ($0.0578/kWh). The deregulated markets in the U.S. with the highest price are Massachusetts ($0.0993/KWh) and New Jersey ($0.0968/kWh).
The National Oceanic and Atmospheric Administration’s 8-14 day outlook is predicting above-normal temperatures across most of the U.S., except the Mid Atlantic and Northeast regions, where slightly below-normal temperatures should prevail. Most long-term forecasts call for a hot summer and plenty of cooling demand.
So far, summer cooling demand is lower than 2015 levels. However, power burn and natural gas demand are structurally increasing, which has helped lower year-over-year natural gas storage surplus figures. U.S. gas production is nearly five billion cubic feet per day (Bcf/d) lower than last year. Demand increases from liquefied natural gas, and gas exports to Mexico, have added an additional 1 Bcf/d. The difference largely explains the year-over-year storage injection variance.
The near-term natural gas market ticked up again last week, with the prompt month closing at $2.623 per million British thermal units (MMBtu), up $.043. The 12-month contract also finished higher, moving up $.029 to $2.94 MMBtu. Today’s natural gas prices have risen more than 30% from sub $2/MMBtu levels seen in March 2016.
Long-Term Price Benchmark Trends
The U.S. Energy Information Administration (EIA) reported last week that “heading into the summer cooling season, the New York Mercantile Exchange (NYMEX) natural gas contract for July 2016 has markedly exceeded Henry Hub spot prices, likely reflecting expectations for summer natural gas consumption to increase substantially from current levels.” The EIA also forecast “relatively flat natural gas production through late 2016, raising prospects of a tighter domestic natural gas market in the near term.” They go on to note working stocks in underground storage were 69% above year-ago levels on April 1, the beginning of the cooling season, but this surplus has narrowed to 29% as of June 3. If natural gas production fails to rise along with demand, gas prices may continue to increase as the summer heats up.”
Once the summer heat really starts to pick up, surplus storage should materially decrease by the middle of July. If consumption rises to 68 Bcf/d, we could see a weekly storage injection figure as low as 23 Bcf. This would be extremely bullish for gas prices, and it would likely drive storage below 4.0 trillion cubic feet by the end of the injection season. Marcellus and Utica will continue to compensate for extensive rig closures in all other producing basins. Long-term average gas prices should continue to rise much higher than $2.60/MMBtu. We may see prices escalate to the $3.50/MMBtu range by this fall.
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.