Following a 19% plunge in natural gas prices over the past two weeks, the Energy Research Council national average benchmark price for retail electricity dropped by 1.0% last week to $0.0738 per kilowatt hour (kWh). Texas posted the biggest price decline last week, falling 2.5% to $0.0418/kWh. Texas electricity prices, however, are still almost 4% higher than they were a month ago. Other states that saw a meaningful price drop last week include Rhode Island (-1.7%), Maine (-1.5%), Massachusettes (-1.4%), New York (-1.4%), and Connecticut (-1.3%).
Electricity prices are now around 3% lower than they were a month ago in Maine and Rhode Island, while they are 2% lower month-over-month in New York. The national average benchmark price for a December electricity contract is now 2.7% lower than it was 12 months ago.
Short-Term Price Benchmark Trends
NYMEX prompt month (November) natural gas futures rallied to a 22-month high of $3.34/MMBtu earlier this month based on expectations for a cold winter. That said, the extended warm weather we’ve been experiencing this fall has caused prices to plunge as much as 70 cents (19%) within a short two-week time frame. The December contract is now trading around $3.15/MMBtu based on mild weather and a delayed start to the heating demand season. Looking longer term, natural gas prices for the coming winter (Nov16-Mar17) increased 13 cents to $3.45/MMBtu over the past month. Winter gas prices are now 39 cents higher than the same time a year ago. So while warm weather has depressed near term natural gas contracts, the market is still pricing in a premium for a cold winter.
Looking back at natural gas trading activity since 2015, pricing has fluctuated between $2.50/MMBtu and $3.40/MMBtu with the exception of last winter when prices were noticeably lower. Should we have another mild winter, prices are likely to remain between the primary trading levels of $2.50/MMBtu to $3.40/MMBtu. A cold winter would likely move natural gas prices above the $3.50 mark.
Long-Term Price Benchmark Trends
The near term weather forecast calls for above-normal temperatures over most of the country through the front half of November. NOAA’s longer term winter outlook still projects cold, below-normal temperatures concentrated mainly in the Midwest and East.
Equatorial Pacific water temperatures warmed a bit in mid-October, consistent with a weak La Nina. A weak La Nina tends to lead to a cooler-than-normal winter across the northern part of the country with warmer-than-normal anomalies centered over the Southwest and to a lesser extent into the southern U.S.
While natural gas injections into storage have fallen below the five-year average for 25 straight weeks, last week’s injection of 73 billion cubic feet (Bcf) marks the smallest weekly deficit to the five-year average net injection since April 2016. Working natural gas stocks now stand at 3,909 Bcf, which is 1% greater than last year’s level and 5% greater than the five-year (2011–15) average for this week.
Working gas stocks are poised to end the 2016 refill season at near record levels. In 2015, working gas stocks totaled 3,926 Bcf at the end of October, before reaching the record highest reported level of 4,009 Bcf on November 20, 2015. If warm weather keeps demand weak we should easily top the 4,000 Bcf mark at the end of this extended injection cycle. On the other hand, gas production fell to year-to-date lows this month as producers in the Marcellus/Utica region decreased production in response to low prices. Gas prices will need to rise into the $4+ range for the production community to ramp back up in response to a cold winter and increasing demand.
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.