Following a steep decline in natural gas prices, the Energy Research Council’s (ERC) national benchmark price for an April 2017 electricity contract fell 1.5% last week to $0.0748 per kilowatt hour. The average benchmark price is now 2.2% below where it was a month ago.
The greatest decline in electricity prices last week occurred in Texas (-3.4%), Delaware (-3.0%), and New York (-2.2%). Month over month, the average benchmark electricity price has dropped most significantly in Texas (-7.1%), District of Columbia (-4.5%), and Delaware (-3.5%). The average benchmark price for electricity now ranges from a low of $0.0387/kWh in Texas to a high of $0.1055/kWh in Massachusetts.
February is ending as the warmest since 1950, and above-normal temperatures are forecast for most of March. Although a brief cooling trend has entered the short-term outlook, winter is no longer a factor affecting gas prices. Looking past the shoulder months, it is worth noting that 9 out of the top 10 warmest winters were followed by a hotter-than-normal summer. The current 10-year normal temperature is also near the 8th hottest summer since 1950. Unless another El Nino develops, we could see an abnormally large number of cooling-demand days this summer, which would tighten gas supply/demand going into next winter.
As mild weather continues, the April 2017 NYMEX natural gas contract dipped below the $2.721/MMBtu support level several times last week. At midday on the 27th, it had again dropped below the $2.70/MMBtu mark to the lowest price point since last April. The 2018-2025 natural gas Calendar Strips are also close to their all-time lows.
Depressed by historically low gas prices, we are seeing the first year-over-year decline in gas production since 2005. Prolific Marcellus/Utica shale gas has been unable to offset production declines in other regions due to inadequate pipeline access into higher priced markets like New England and the Midwest. Nine new pipeline projects should begin to alleviate this problem and increase production toward the end of this year.
On the demand side of the equation, gas exports are projected to make up an increasing proportion of gas consumption going forward. Gas exports to Mexico have doubled since 2009 and are forecast to continue rising through at least 2020 as pipeline projects currently under construction are completed. By the end of 2017, twelve new natural gas pipelines are expected to be placed in service. In addition, power plant operators are expected to install 1,990 MW of new combined cycle natural gas power.
In addition to Mexico, LNG exports are expected to expand rapidly over the next several years. By 2021, Sabine Pass and Cove Point (MD) will be joined by three other LNG export facilities with an operational export capacity of 9.2 billion cubic feet per day. As a result, LNG exports are expected to see an increase of 8.9 Bcf/d by 2020, up from roughly 2 Bcf/d currently.
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.