ERC’s national average benchmark price for retail electricity increased only a fraction of a percent (0.3%) last week to $0.0754 per kilowatt hour. The average benchmark price is now 1% lower than it was a month ago. Prices fluctuated last week, increasing in some states, decreasing in others.The District of Columbia (1.5%), Ohio (1.3%), and New Jersey (1.0%) saw the largest price increases last week. In contrast, electricity prices dipped the most in Texas (-1.3%) and Rhode Island (-1.2%).
While electricity prices do tend to follow gas prices, volatility in the natural gas market translates into a much smoother, incremental rate of change in electricity prices. Natural gas prices closed last week almost 4% higher, while electricity prices remained static. In 2016, natural gas prices varied from where they started in January by as much as 31% on the downside and 63% to the upside. By contrast, electricity prices only dropped 7% below where they started in January 2016 and rose only 5.5% from that point all year.
Short Term
At the end of last week, the February 2017 natural gas contract traded at $3.42/MMBtu. Where gas prices go from here will largely be driven by weather. The latest 11-to-15 day weather outlook is predicting colder-than-normal temperatures in February for the Mid-Atlantic, New England, and the northern mid-section of the country. If the temperatures for the rest of January and February remain above average, natural gas prices should decline to between $3 and $3.25/MMBtu. If we experience normal temperatures, natural gas prices will likely stay between $3.25/MMBtu and $3.75/MMBtu. But if we see another polar vortex in the late January to mid-February timeframe, we could see gas prices moving up into the $3.75/MMBtu to $4.25/MMBtu range.
Long Term
The Energy Information Administration’s (EIA) Short Term Energy Outlook released last week predicts that 2017 will generate 6.7% more heating days and a 5.2% increase in commercial gas consumption compared to 2016. The report also notes that last year dry natural gas production dropped 2.4% compared to 2015, the first decline in annual average natural gas production since 2005. Based on an assumption of relatively normal temperatures through the first quarter of 2017, EIA’s outlook forecasts natural gas inventories to be 3.3% below the five-year average. With inventories expected to build at a slower pace than the five-year average from the end of March through October, EIA projects gas storage will be 5% below the previous five-year average for the end of October. Taken together, increased demand, reduced production, and contracting inventories all argue for higher natural gas (and electricity) prices heading into next winter compared to where prices stand today.
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.
