For the third week in a row, Energy Research Council’s (ERC) national average benchmark price for electricity rose, this time by 0.82% to $0.0760 per kilowatt hour. Prices increased most in the District of Columbia (2.2%), Texas (1.7%), Massachusetts (1.6%), Ohio (1.3%), Connecticut (1.2%), New York (1.0%), Maryland (1.0%), and Illinois (1.0%).
Month-over-month, electricity prices have increased steadily in the District of Columbia (2.5%), New York (2.5%), and Massachusetts (2.0%). Only Texas prices have declined (-1.6%) since this time last month.
Last week, benchmark prices for longer term (36-60 month) electricity contracts were again lower than short-term (12-24 month) contracts in Massachusetts, New Jersey, Ohio, and Pennsylvania. Backwardation in longer term natural gas futures continue to favor long-term electricity contracts. Currently, longer-term contracts (calendar strips 2019-2023) are, on average, just 13.7 cents above their lowest points, and considerably lower than the 2018 strips.
As of Tuesday, the NYMEX June 2017 natural gas futures contract was trading around $3.24/MMBtu, while the soon-to-be prompt month July contract dropped to $3.15/MMBtu. This puts the June contract in a technical trading range that has mostly been in play since early March, with boundaries at $3.30/MMBtu on the resistance side and $3.10/MMBtu on the support end.
The eight to fourteen-day forecast now projects colder-than-normal temperatures dominating the eastern half of the US. Around 50 percent of the country is expecting below-normal temperatures into the second week of June. Conversely, the current outlook for the June-August period is indicating higher than average temperatures across most of the East and West Coasts.
The expected mild temperatures during the coming weeks will likely place downside pressure on the nearby futures relative to the deferred contracts. 2018 contracts have improved substantially since the end of 2016, and now trade at $3.11/MMBtu, but the 2019+ contracts remain lower than $3/MMBtu. The backwardation in the curve is preventing producers from hedging a few years in advance and ramp up production. Rig counts have consistently risen over the last year, with natural gas rigs increasing by 8 to 180 last week. US gas production, however, is still around 71 to 71.5 Bcf/d and we are currently on pace for the lowest May injections into natural gas storage on record. Net injections to working gas totaled 75 billion cubic feet (Bcf) for the week ending May 19. Working natural gas stocks are 2,444 Bcf, which is 13% less than the year-ago level and 11% more than the five-year (2012–16) average for this week.
The expectation is for US gas production to rise, but the question is when and how fast? The longer production continues to languish, the higher the likelihood that gas prices will move closer to $3.50/MMBtu for 2018, with the 2019+ contracts escalating above the $3/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.