ERC: Price Benchmark Trends Week Ending June 24, 2016

Short-Term Price Benchmark Trends

ERC’s average benchmark price for retail electricity in the 13 restructured states declined slightly last week (-0.29%) to $0.0748 per kilowatt hour. The sharpest drop was seen in the District of Columbia (-1.85%), followed by Delaware (-1.34%), and Pennsylvania (-1.15%). Conversely, the average benchmark price rose in Texas (+1.04%) and New York, (+0.82%), leaving both states with notably higher electricity prices than a month ago, +3.14% and +4.70% respectively. 

The weather outlook over the next two weeks projects a cool-down across much of the Mid-atlantic through the Midwest. This may boost the extremely weak series of injections seen over the past month as we enter the first half of July. Longer term forecasts, however, still call for a warm summer that will continue to draw down on the current natural gas storage surplus.

Since its low point of $1.6110 in mid-March, NYMEX natural gas futures have risen an amazing 70%, with most of the gain realized in the past four weeks. From a technical perspective, the soon to expire spot July contract has once again breached the upper range support and is now solidly trading above the $2.72/mmbtu resistance level. The soon to be spot August contract is now trading slightly above its range resistance level of $2.80/mmbtu, indicating that the market may be poised to move even higher.

Long-Term Price Benchmark Trends

Left unchanged, the plunge in rig counts this year will likely reduce natural gas production by around 1½-2% on a year over year basis through the rest of the summer. Production could make a rebound, however, as there is some evidence that producers are reacting to higher natural gas prices, with rig counts increasing amid better drilling economics. The oversupplied Canadian market could also partially offset US output declines, but much of that is countered by a stronger than anticipated export demand into Mexico.

As of June 17th. the Energy Information Administration reported natural gas stockpiles stood at 3.103 trillion cubic feet (tcf); 24.9% above last year’s level and 28% above the five-year average. Just three weeks ago it was 32.4% above last year’s level and the five-year average surplus was 35%.

Low prices over recent months have led to the slowest stockpile build in years. So far in 2016, injections into inventories total 635 bcf. By this time in 2015, there were 1.045 tcf. of natural gas added to stockpiles by the middle part of June. 2012, when the injections totaled 694 bcf, was the last time the stockpile build was under 700 bcf. The trend in stockpile injections shows a dramatic decline in production in 2016 and price is the reason. When natural gas was at the $2 per MMBtu level, production became uneconomic. The question is whether the higher price environment into which natural gas is moving will motivate the producer community to increase production and provide sufficient storage reserves heading into next 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.