Short-Term Price Benchmark Trends
The ERC national price benchmark for retail electricity in deregulated states dropped again last week to a new low of $0.0705 per kilowatt hour. Prices decreased the most in DC (-1.4%), Illinois (-1.3%), and New Jersey (1.3%). Prices declined in every deregulated state, except Texas and New York, where prices increased 1.4 percent.
The National Oceanic and Atmospheric Administration weather outlook continues to project a warming trend across a majority of the U.S. The six-to-fourteen day forecast calls for above-normal temperatures over 80% of the eastern half of the U.S., with a small pocket of below-normal temperatures on the West Coast. Based on current temperature forecasts, natural gas storage inventory withdrawals are likely to be below normal for this time of the year, adding yet more volume to an already bloated surplus of natural gas.
Long-Term Price Benchmark Trends
Last week, the natural gas prompt contract price fell $0.13, to a new low of $1.666 per million British thermal units (MMBtu). Weather and lackluster demand continue to press natural gas prices against the technical support level of $1.612/MMBtu. Once this support level is solidly breached, the market is likely to head toward the $1.40 to $1.50/MMBtu trading range, a level that was last seen in the mid-1990s.
With weak demand looking like it will continue into the summer season, a decline in production is the only factor likely to stabilize prices. To date, the dramatic plunge in oil and gas rig counts during the past 18 months has not slowed production in the important Marcellus and Utica regions. Many in the financially distressed producer community continue to bear production costs that are higher than market prices just to generate the necessary cash flow to stay in business.
The question is, how many producers will shut their doors before supply and demand are balanced. With liquefied natural gas exports beginning to ramp up, and the eventual return to more seasonable temperatures, the real question is whether production will retain its capacity to meet demand. If too much of the production infrastructure is lost by the time demand reasserts itself, we may see prices boomerang to high levels we haven’t seen for some time.
As the economic textbooks point out, markets tend to cycle between supply-side and demand-side dominance, rather than sustain a continuous balance. And, when a substantial and sustained imbalance occurs, a disproportionate swing to the other end of the spectrum tends to follow.
Jim Moore, PhD, is president of the Energy Research Council. ERC manages a portfolio of primary research programs and databases that evaluate energy prices, procurement practices and management strategies.
Jim 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.
*The weekly average price benchmarks are derived from a standardized database of daily matrix prices issued by many electricity suppliers. The database is updated every business day and includes prices issued from September 2013 forward. The benchmarks are derived by aggregating individual supplier prices across the General Service tariff rate classes for each electric utility, and then averaging the utility price benchmarks together for a state level benchmark. Finally, these state level benchmarks are averaged across the five business days of each week to create the weekly average price benchmarks by state. These benchmarks reflect the average prices for General Service tariff rate classes by utility and state, based on next month’s start date. As mentioned, these benchmarks are based on matrix prices for commercial customers with an annual usage of up to 1 million kWh. While they are not a valid measure of pricing for larger C&I customers, the high level of correlation between matrix and custom pricing make the benchmarks a reliable measure of how prices are trending, as well as the direction and velocity at which prices are changing week-over-week and month-over-month. This is similar to how the S&P or Dow measures the rate and direction of change in stock market prices over time.