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ERC Price Benchmarks Week ending 1-20-17

Moving to a March prompt month, ERC’s national average benchmark price for retail electricity treaded water last week, increasing from the previous week by only 0.2% to $0.0761 per kilowatt hour. The average benchmark price is now only 0.2% higher than it was this time last month. Prices declined last week in Maine (-2.2%) and Delaware (-0.6%). In all the other restructured states, electricity prices increased, with the largest gains seen in Texas (1.5%).

A year ago, the price for a March electricity contract with a 12 month term was 4.4% lower than last week’s price. Year-over-year, the same March contract with a 36 month term was 0.2% lower than last week. Longer term contracts have generally maintained a lower price than shorter term contracts since November of last year.

Short Term

The spot February NYMEX natural gas contract decreased by 6.3% last week. The spot contract is now back to trading around the same level it was in the second half of November, the early stages of the winter heating season. At the end of last week, the price for a February natural gas NYMEX contract had dropped to $3.18/MMBtu, representing a 8.4% decline from the previous week’s closing price of $3.47/MMBtu. The February contract’s current technical boundaries are now around $3.28/MMBtu on the resistance side and $3.09/MMBtu on the support side. This represents a new lower trading range than just a week ago.

The market sentiment looks like it is starting to shift toward possibly discounting the remainder of the winter heating season. The latest medium term (Feb/Mar/Apr) forecast from NOAA now projects the main natural gas heating regions of the US will experience normal to above normal temperatures over the next three months.

Heating Degree Days as a whole for this winter are about 16% lower than the average. As warmer weather moves back into the forecast, demand has begun to fall sharply. Total U.S. consumption of natural gas fell by 22% compared with the previous report week.

Colder-than-normal weather in the first half of January and declining production led to a large withdrawal from storage last week of 243 Bcf, compared with the five-year (2012–16) average net withdrawal of 170 Bcf and last year’s net withdrawal of 175 Bcf during the same week. Working natural gas stocks totaling 2,917 Bcf, are now 3% below the five-year average and 13% below last year at this time. This week’s storage withdrawal marks the third time that weekly net withdrawals have topped the 200 Bcf mark during the 2016–17 heating season.

Natural gas production has been declining for the last nine months on a year-over-year basis, and January could be the 10th month. According to Pointlogic, in the week ended January 11 production decreased by about 3.8% compared to the same time last year.

Long Term

In its January 2017 Short-Term Energy Outlook (STEO), EIA expects the Henry Hub natural gas spot price to average $3.55 per million British thermal units (MMBtu) in 2017 and $3.73/MMBtu in 2018, both higher than the 2016 average of $2.51/MMBtu. Higher prices in 2017 and 2018 reflect natural gas consumption and exports exceeding supply and imports, leading to lower average inventory levels.

After declining in 2016 for the first time since 2005, dry natural gas production is forecast to also increase in both 2017 and 2018. The return to increasing production reflects a forecast of higher Henry Hub natural gas spot prices as well as pipeline infrastructure buildout, particularly in the Marcellus and Utica natural gas producing regions in and around Ohio and Pennsylvania.

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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.

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