ERC Price Benchmarks, Week Ending 4/28/17

Energy Research Council’s (ERC) national benchmark price for a June 2017 electricity contract fell last week by 0.87% to $0.0751 per kilowatt hour. The biggest price decline was in Illinois (-2.0%) where prices are still adjusting to the drop in capacity charges produced by MISO’s most recent capacity auction. Illinois electricity prices are now 8.3% lower than they were this time last month. Prices also declined last week in Rhode Island (-2.0%), Connecticut (-1.9%), Maine (-1.4%), and New York (-1.2%).

Bucking the downward trend, the benchmark price for electricity in Texas rose by 2.1%. Last week, benchmark prices for longer term (36-60 month) electricity contracts were again lower than short-term (12-24 month) contracts in the Massachusetts, New Jersey, Ohio, and Pennsylvania. Forward markets for 2018–2020 remain within 2% of all-time lows except in New York and Texas. Higher gas prices year-over- year are supporting power prices for 2018 and beyond.

Short Term

Natural gas prices rose 2.6% last week. This week, NYMEX gas futures started trading in the $3.25-$3.30/MMBtu range and are likely to continue in a tight range for the immediate future. On a fundamental supply and demand basis, the summer is shaping up to be a hot one with plenty of cooling demand. The National Oceanic and Atmospheric Administration (NOAA) has issued a warm June through August temperature forecast, with widespread above-normal temperatures throughout most of the nation. Two important factors that may influence Summer’17 temperatures are drought conditions and the pace of El Nino development. A faster development or strengthening of El Nino favors cooler weather, while a slower development tends to introduce hotter temperatures. NOAA now gives El Nino a 50% chance of developing late in the October to December timeframe.

Long Term

Demand saw a material tick upward last week due to much higher power burn demand stemming from nuclear outages and increased Mexico export. LNG exports are also increasing with Sabine Pass averaging 2.3 Bcf/d in Q1 (as opposed to ~0.5 Bcf/d a year ago) and an additional 1.4 Bcf/d is expected by end of 2017.

On the supply side, Baker Hughes announced the total U.S. rig count rose last week by another 13 to 870, marking the 15th consecutive weekly increase. There were 9 additional oil rigs, making 697, also up for a 15th straight week, and gas rigs increased by 4 to 171. Operating rigs have now increased by 99% (426 rigs) year-over- year.

Despite the increase in drilling activity, daily average gas production stands at 70 Bcf/d, a 3% decline from year-ago levels. Natural gas output has increased only one time in the past five weeks. Storage now stands at 2,115 Bcf or -368 Bcf (-15%) below year-ago levels, but 15% above the five-year average.

With the waning of injection season, the market’s focus now turns to end of October storage levels; the U.S. Energy Information Administration’s (EIA) Short-Term Energy Outlook (4/12) estimates end of October ‘17 storage will be 3,833 Bcf; 3% below year-ago levels and only 1% above the five-year average.

Declining production coupled with increased exports have helped narrow the storage surplus, despite a warm winter. Further tightening in the market or an above-normal summer could move end-of- October inventories below the five-year average and that would likely pressure prices upward significantly.

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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