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ERC Price Benchmarks Week ending 3-3-17

For the third week in a row, the Energy Research Council’s (ERC) national benchmark price for an April 2017 electricity contract fell 0.7% to $0.0743 per kilowatt hour. Electricity prices dropped in every deregulated state last week except in Delaware (+0.2%) and Texas (+0.7%). By contrast, Illinois (-1.7%) and Maine (-1.5%) posted the greatest decrease in electricity prices.

The average benchmark price is now 2.4% below where it was a month ago (February 3rd), but back to where it stood two months ago on January 6th.The steady decline in retail electricity prices since mid-February has produced the biggest month-over-month price reduction in Texas (-5.9%), the District of Columbia (-4.5%), Illinois (-4.4%), and Delaware (-3.7%).

Over the past year (starting on April 1st 2016), the average benchmark price for an April 2017 electricity contract has ranged from a high of $0.0723/kWh on 7/15/16 to a low of $0.0667 on 12/2/16. Currently the benchmark price is only 0.01% lower than back in April 2016.

Short Term

Week-over-week, a brief introduction of cooler temperatures moved the NYMEX April 2017 contract for natural gas up from $2.69/MMBtu on February 27th to around $2.87/MMBtu on March 6th, an increase of over 7%. However, with winter all but gone and a storage surplus that is 14% greater than the five-year average, there is little pressure driving prices above the important $3.00 mark.  From a technical perspective, the April NYMEX contract is still in a technical trading range of around $2.721/MMBtu on the support side and $2.952/MMBtu on the resistance side.

Long Term

So far in 2017, net withdrawals from storage are 77% below the five-year average. It is now likely we will end the 2016-2017 heating season above the 2.2 Tcf storage level. This will mark the third time over the past five years that gas stocks ended the heating season above 2 Tcf. Even though demand is slated to increase into the summer and for the rest of 2017, stocks should remain sufficient to keep natural gas prices relatively stable.

On the other side of the equation, natural gas production remains very sluggish. Annual production for 2016 was down 2.2% from 2015 levels and declining production has continued into the first two months of this year. According to Baker Hughs, natural gas rig counts decreased again last week by 2 to 151. Shale gas from the Marcellus/Utica regions now comprise a growing proportion of domestic gas production but its distribution is constrained by inadequate pipelines that likely won’t be resolved until the end of this year. Therefore, most of the production growth anticipated for this year is expected late in the fourth quarter.

Apart from weather, which may provide a lot of cooling demand this summer, natural gas exports to Mexico and the construction of export terminals for liquid natural gas (LNG) are projected to increase demand for the remainder of this year. If production continues to decline due to low gas prices, we may very will see a considerable supply/demand tightening in November that could easily escalate prices toward the $4/MMBtu level.

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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