As the prompt month changes to April, Energy Research Council’s (ERC) national average benchmark price for competitive electricity dropped by 0.5% last week to $0.0759 per kilowatt hour. The price decline in electricity was consistent with declining natural gas prices over the past two weeks. The benchmark price has dropped 0.6% over the past month. Last week, benchmark electricity prices dropped in almost every state, with the biggest declines in Texas (-2.5%), District of Columbia (-1.9%), and New Jersey (-0.8%). Month-over-month electricity prices have fallen in Texas by 5.4% and in District of Columbia by 2.6%. Prices in other deregulated states are very close to where they were a month ago.
In many states, the benchmark price for longer term electricity contracts (36-60 month terms) is lower than short term contracts. This continues to result from “backwardation” of the natural gas market, with the longer term 2020-2022 calendar strips trading at a lower price than the 2017-2018 strips.
Short Term
February is clocking in as the warmest since 1970 and it looks like the trend is continuing. Warmer-than-normal temperatures are now forecast into the second week of March for the Eastern U.S., including the main gas heating demand regions. The rest of the country, except the West Coast, is expected to experience normal temperatures over the next three weeks. At this point, winter appears all but over and any cold weather toward the end of March is not likely to spike demand enough to significantly influence gas prices.
Since peaking at the end of last December, the spot March 2017 natural gas contract has plummeted by almost $1/MMBtu. Last week, the March NYMEX contract blew through the $2.90/MMBtu support level and into a new lower trading range that has not been in play since November of last year. The March NYMEX natural gas contract’s technical boundaries are now around $2.90/MMBtu on the resistance side and $2.76/MMBtu on the support side.
Long Term
While an abnormally warm winter has kept both gas and electricity prices tethered to their six-month lows, several structural changes may move prices substantially higher as we enter next winter. Weak production will likely persist while gas prices stay below the $4/MMBtu level. Only Marcellus/Utica production currently exceeds local demand, but the surplus can’t be distributed due to pipeline constraints. New pipeline construction should open shale gas to other higher-priced markets toward the beginning of next year. This will likely be too late to balance a significant supply deficiency going into next winter.
While production remains stagnant, demand for natural gas will increase in the months to come as new power generation, higher Mexico gas exports, LNG, and industrial demand adds 2.8 Bcf/d to total demand. According to the latest Platts Analytics projections (owned by S&P), working gas storage levels are expected to rise to just 3.4 Tcf at the end of injection season (November 2017). That is 12% below the corresponding level last year, 5% below the five-year average, and the lowest ending October level since 2008. Should this scenario occur, demand will overwhelm supply and drive both natural gas and electricity prices up significantly.
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.
