ERC Price Benchmarks Week ending 3-17-17

Energy Research Council’s (ERC) national benchmark price for a May 2017 electricity contract rose last week by only 0.20% to $0.0750 per kilowatt hour. The week-over-week change in electricity prices varied only slightly at the state level, with some states posting a small increase and others a minor decrease.

Over the past month, the national benchmark electricity price has dropped by 1.6%, with the greatest decrease seen in Illinois (3.9%), Delaware (2.7%), Maryland (2.2%), and Maine (2.1%). Prices have been gradually declining since the cold-weather driven spike last December. Since then, relatively mild temperatures have moved electricity prices downward by 4.5%. Looking back a year ago, the average benchmark price for a May electricity contract was 2% higher than it is today.

The average benchmark price for longer-term (36-60 month) contracts was lower last week compared to the price for short-term (12-24 month) contracts in a number of states including Massachusetts, New Jersey, Ohio, Pennsylvania, and the District of Columbia.  This is consistent with prices for calendar strips     2019 – 2021, which are still near their all-time lows in CAISO, ERCOT, MISO, and PJM WEST. In the NYISO and NEPOOL regions, calendar strip prices for the same term are 15%-20% above lows set late last year and earlier this year. The NYMEX natural gas calendar strips 2018-2020 are also trading flat compared to prompt month prices.

Short Term

With the advent of spring and a forecast for relatively mild temperatures extending into mid-April, the impact of weather on energy prices has taken a back seat to natural gas production and storage. Last week’s cold snap should result in the largest withdrawal from storage since last February. While this might create a temporary spike in prices, inventories remain 21% above the five-year average and more than sufficient to hold prices down within their current trading range.

From a technical perspective, the April 2017 NYMEX contract ended Friday’s trading session back in the lower trading range that has been in play since the middle of February. The April NYMEX natural gas contract’s current boundaries are now $2.952/MMBtu on the resistance side and $2.721/MMBtu on the support side.

Long Term

With weather turning mild and storage at ample levels, the focus moving forward is on demand and production. According to the EIA, U.S. consumption of natural gas rose by 15% over the last report week. Power burn climbed by 12% week-over-week, and consumption increased by 24% in the residential and commercial sectors. At the same time, natural gas exports to Mexico remain strong and LNG exports continue to expand.

Production, however, is not keeping pace with expanding demand. Growth in Marcellus and Utica Shale production has created the largest single-supply basin in the country. Shale gas has, in large part compensated for the huge number of rig closers in other gas basins. The distribution of shale gas outside of the Marcellus/Utica region is currently constricted by inadequate pipeline capacity. While interstate pipelines are being converted to bi-directional and new pipelines are being constructed, it will not be until 2018-2019 that shale gas production is optimized. The question is, will growing demand or extraordinary weather exhaust gas reserves before production can ramp up in response?

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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