Energy Research Council’s (ERC) national benchmark price for a June 2017 electricity contract fell last week by 0.32% to $0.0758 per kilowatt hour. This is the second week electricity prices have declined, moving the national average benchmark price back to where it was at the end of March.
By far, the largest price movement last week was in Illinois, where average benchmark price dropped by 6.13%. All the other deregulated states shifted marginally, by less than half a percent in either direction. The plung in Illinois electricity prices is primarily due the Midcontinental Independent System Operator’s (MISO) annual Planning Resource Auction (PRA) that sets capacity prices. This year’s auction set capacity prices for June 1, 2017 through May 31, 2018 at $1.50 per MW-day. This price is significantly lower than the $72.00 per MW-day set at last year’s action.
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, Maine, Maryland, Massachusetts, New Jersey, Ohio, Pennsylvania, and Texas. The reason longer-term contracts have enjoyed such favorable pricing over the past several months is that NYMEX 2019-22 calendar strips for natural gas have stayed well below Calendar 2017-2018 prices due to a tightening supply-demand balance. This has pushed NYMEX Cal’17 and ’18 prices well above year-ago levels while outer year Cal 2019-2025 strips have remained below $3.00 in anticipation that production will eventually rebound and sustain sufficient natural gas surplus to meet growing demand.
After trading in the $3.10-$3.25 range last week, May NYMEX futures closed Friday at $3.10/MMBtu. Last week’s decline moved May futures into a new lower technical trading range with boundaries around $2.95/MMBtu on the support side and $3.21/MMBtu on the resistance end.
Moderate temperatures last week reduced residential and commercial demand for natural gas by 28% compared to the previous week. Overall consumption fell by 6% week-over-week while natural gas exports to Mexico decreased 24% due to pipeline maintenance.
Weather forecasts from NOAA for the next two weeks anticipate a cool-down across the central United States but warmer-than-average temperatures along both coasts. This should keep demand low and allow storage levels to increase over the next few weeks, with EIA projecting 1,750 Bcf to be added to inventory over the remaining shoulder months.
Most of the large surplus in natural gas that pressured prices downward in early 2016 is dissipating. Last week, storage levels were 15% above the five-year average. The EIA’s Short-Term Energy Outlook anticipates that storage will be only 1% above the five-year average by the end of October.
As storage levels come down, production continues to decline. Shale gas produced in the prolific Marcellus/Utica region is unable to reach other markets due to limited pipeline capacity. Even though gas rigs have increased from 86 to 165 this year, production in other regions has not improved.
Demand is anticipated to increase through 2020 because of rising Mexican exports, expanding LNG exports, escalating power burn, and growing industrial consumption.
This scenario increasingly suggests a tightening supply-demand balance that could push prices higher as the 2017-2018 winter season begins.
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.