ERC Price Benchmarks: Week Ending 5/12/17

 

Energy Research Council’s (ERC) national benchmark price for a June 2017 electricity contract rose slightly last week by 0.26% to $0.0751 per kilowatt hour.  The largest price movement was in New York where the benchmark price increased by 1.0%. Prices in other deregulated states shifted by only a fraction of a percent in either direction. Month-over-month, benchmark electricity prices are significantly lower in Illinois (-8.2%), and to a lesser extent in Connecticut (-2.0%), and Rhode Island (-1.8%).

Last week, benchmark prices for longer term (36-60 month) electricity contracts were again lower than short-term (12-24 month) contracts in the District of Columbia, Massachusetts, New Jersey, Ohio, and Pennsylvania.

NYMEX prompt month natural gas futures closed at a year-to-date high of $3.424/MMBtu last Friday, but prices have already started to shift lower. Last week’s price surge was in part due to FERC’s construction halt of the Rover pipeline, delaying its July in-service date for moving low cost shale gas out of the Marcellus basin. In addition, a combination of tightening supply/demand relationship due to stagnant production and a recent spike in natural gas demand produced a lower-than-expected storage injection last week, putting upward pressure on prices.

Despite last week’s upturn in natural gas prices, fundamentals continue to tether the market within a tight technical trading range between $3.422/MMBtu on the resistance side and $3.305/MMBtu on the support end. For the market to break into the $3.50+ range, we would likely have to see a significant increase in production or a very hot weather forecast. While production rebounded last week to its highest weekly output level since last February (70.8 Bcf/d), production is still lagging year-ago levels by 1.7%. Likewise, the latest weather outlook is tepid, with no early start projected for the summer cooling season.

EIA forecasts indicate that natural gas demand will continue to exceed supply throughout 2017. In addition to an uptick in power burn and industrial consumption, gas exports continue to push demand upward.  LNG feedgas demand increased 10% to set a new weekly record of 2.3 Bcf/d last week. LNG exports have risen by 1.8 Bcf/d (+360%) from year-ago levels. Likewise, new pipeline capacity continues to increase Mexican exports.

In short, a tightening supply/demand relationship in the October timeframe is likely to drive gas and electricity prices upward.  The factors arguing for escalating prices include increasing domestic and export demand, projections for a hot summer, and continued sluggish production.  While few in number, factors pressuring prices to decline include EIA’s forecast of higher 2017 production, a moderate summer, and the opening of Marcellus shale gas to other higher price markets.

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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