The ongoing decline in electricity prices, which began in mid-February, bottomed out last week. Energy Research Council’s (ERC) national benchmark price for an April 2017 electricity contract leveled off at $0.0745 per kilowatt hour, just 0.25% higher than the previous week. Most states saw a slight increase in electricity prices, led by Texas (+1.4%). The national benchmark electricity price is still substantially lower than a month ago (-2.3%), particularly in Illinois (-4.3%), the District of Columbia (-4.1%), and Texas (-3.9%).
Last week longer term electricity contracts (36-60 months) were less expensive than shorter term contracts (12-24 months) in several states including the District of Columbia, Massachusetts, New Jersey, New York, Ohio, and Pennsylvania. This seems to reflect the lower-priced natural gas 18-20 Calendar Strips compared to the nearer Summer 17 strip prices.
A strong shot of winter weather this week has spiked natural gas prices to just above the $3/MMBtu mark. Since hitting a bottom during the second half of February, the spot April 2017 contract has increased by $0.37/MMBtu or 14%. However, with a warming trend currently projected across the main natural gas heating regions, further price escalation should be held in check. Even with the current cold temperatures, natural gas inventories remain more than ample to cover heating demand and finish the winter season well-above normal levels. From a technical perspective, the April 2017 NYMEX natural gas contract ended last week with boundaries around $2.95/MMBtu on the support side and $3.10/MMBtu on the resistance end.
So far this year, net withdrawals are 30% below the five-year average. Although production remains depressed in this low-price market, working gas stocks are still on pace to end the 2016-2017 heating season above 2.1 Tcf. That will mark the third time since 2011 that working stocks ended the heating season above the 2.0 Tcf level.
Working against a supply surplus, total U.S. gas consumption rose by 4% last week, largely driven by an increase of 11% in residential and commercial demand. Natural gas exports to Mexico and LNG exports were also strong last week. The Energy Information Agency’s Short-Term Energy Outlook anticipates new natural gas export capabilities and growing domestic natural gas consumption will move the Henry Hub natural gas spot price from an average of $3.03/MMBtu in 2017 to $3.45/MMBtu in 2018. If production continues to lag and we experience a hot summer with above normal heating demand, we could see natural gas and electricity price reach new highs as soon as November.
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.