ERC Price Benchmarks/Week Ending 4-7-17

Energy Research Council’s (ERC) national benchmark price for a May 2017 electricity contract continued its trend upward, increasing again last week by 0.75% to $0.0762 per kilowatt hour. Prices rose last week in every state except Illinois (-0.06%). The largest increase was seen in New York (2.1%).

The national benchmark price is now 1.74% higher than it was a month ago. States with the highest month-over-month price increases include New York (3.96%), Connecticut (3.1%), New Jersey (2.5%), Rhode Island (2.2%), Maine (2.2%), and Massachusetts (2.2%)

Last week, benchmark prices for longer term (36-60 month) electricity contracts were lower than short-term (12-24 month) contracts in the District of Columbia, Maryland, Massachusetts, New Jersey, Ohio, and Pennsylvania. For the past two months, favorable pricing for longer term electricity contracts has prevailed in many states.

Short Term
Increasing demand, declining production, and expanding exports pushed natural gas prices 2.23% higher last week. Prompt month prices are now up 28% from six weeks ago. On Monday April 10th, the May 2017 natural gas contract closed at $3.21/MMBtu while Calendar 2018 remained at $3.07/MMBtu and calendar years 2019-2021 traded in the $2.83-$2.85/MMBtu range. Natural gas strips remain near all-time lows for 2019–2025.

Long Term
Near-term gas strips trended higher last week in response to heightened demand for power generation resulting from a higher-than-normal number of nuclear generators shutting down for maintenance. Natural gas demand also increased due to elevated coal-to-gas switching.

Mild temperatures are forecast for the rest of April across most of the country. This should keep a cap on gas prices for the immediate future. With forecasts suggesting an early summer and a long-range outlook calling for above-normal cooling demand through the summer season, weather may yet add to demand pressures going forward.

Demand is also climbing because of expanding Mexican gas and LNG exports. With an earlier than expected opening, the Cove Point LNG export facility joins the Sabine Pass export terminal, pushing LNG demand higher by 1.6 Bcf/d. In addition, Mexican gas exports will increase toward the end of this year as numerous pipeline projects dramatically increase export capacity across the southern border.

The extent to which gas supply can support growing demand will ultimately be determined by production. After being range-bound between 70 and 71 Bcf/d for most of this year, U.S. dry production saw its biggest day-over-day decline in almost two years, 0.9 Bcf/d from Monday to Tuesday last week. A 0.3 Bcf/d drop in imports from Canada aggravated the loss of production, resulting in a 1.2 Bcf/d total supply loss in a single day.

So far, the ramp up of operating gas drilling rigs from a low of 89 a year ago to 165 as of last week (an 82% increase) has not increased production. Historically low gas prices continue to keep much of the production community on the sidelines with over 5400 drilled but uncompleted (DUC) wells.

If US gas production doesn’t recover by summer, we could see a price spike as demand builds for winter 2017-2018. Production would need to ramp up to 73 Bcf/d just to cover the current demand drivers coming online. For supply and demand to fully balance at the current time, U.S. gas supplies would need to rise by 6 Bcf/d by the end of this year through a combination of higher U.S. gas production and Canadian gas imports. If a hot summer increases demand further, an even larger increase in production would be needed.

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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