ERC Price Benchmarks, Week Ending 5/5/17

 

Energy Research Council’s (ERC) national benchmark price for a June 2017 electricity contract declined slightly last week, dropping by only 0.28% to $0.0749 per kilowatt hour. The biggest price movement was in Texas where the benchmark price dropped by 3.3%. Prices in other deregulated states shifted less than one percent. Month-over-month, benchmark electricity prices are significantly lower in Illinois (-8.2%), and to a less extent in New York (-2.3%), Connecticut (-2.1%), and Rhode Island (-2.0%).

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, Ohio, and Pennsylvania. This continues to be a function of “backwardation” in both the natural gas and wholesale electricity markets. Calendar 2018-2022 strips are trading considerably below the current 12-month strip. While future prices tend to trend higher than short-term prices due to greater risk, an expectation that production will rebound after this year is keeping 2018-2022 prices comparatively low.

NYMEX June 2017 futures closed last week at $3.266/MMBtu. The market has been unable to sustain a price move in either direction for almost a month. The current technical trading range boundaries are at $3.174/MMBtu on the support side and $3.422/MMBtu on the resistance end. With weather providing little impact through the shoulder months, nothing in the fundamentals provides an argument for prices moving much lower in the foreseeable future. Until summer starts to generate cooling demand, there is also little momentum for prices to move upward.

The weekend short-term weather forecasts remain mixed across the country with a cold pattern now engulfing about 50 to 55 percent of the country. This pattern should continue over the next two weeks with a smaller portion of the country (about 40 percent) expecting below-normal temperatures by the last week in May.

Apart from weather, demand for natural gas continued to expand last week. Total natural gas demand( which includes export volumes to Mexico) rose by 4% compared with the previous report week, while total U.S. consumption of natural gas rose by 3%. Natural gas exports to Mexico increased 16%. Power burn climbed by 9% week-over-week.

Working natural gas stocks are now 14% lower than the year-ago level but 16% higher than the five-year (2012–16) average for this week. The overhang compared to the five-year average is what’s keeping prices from moving upward. However, natural gas dry production is down 3% compared to this time last year. How production responds over the next couple of months, as well as the pace of storage injections and how they reduce or expand storage levels, will be two key factors driving gas prices ahead of this coming winter.

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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