Natural gas and electric prices continue to trade higher than last year. High heating demand and increased industrial demand have contributed to higher pricing. We expect the economy to continue improving, thus keeping industrial demand going strong. We expect that the risk of higher pricing for both natural gas and electric supply outweighs any pricing downturn opportunities. For clients still exposed to utility default pricing or variable pricing for both electric and natural gas loads, we highly recommend reviewing your accounts and negotiating for fixed contracts. Clients should seriously consider securing fixed contracts with longer positions in the market with 24- and 36- month terms.
Natural Gas Storage and Usage
The month of April is complete and the weather still feels like late October. It feels like the weather will jump from winter to summer without much of a buffer. Meteorologists are still determining if the past winter was the 2nd or 3rd coldest in recorded weather history. Does it really matter?
Spring time usually has a calming effect on energy prices due to low demand for cooling or heating. But this year heating demand is still higher than normal in many areas, even though the summer season is fast approaching.
The current concern is the upcoming summer season with natural gas storage at an 11 year low - approximately 50% below the five-year average. To refill the storage to sufficient levels, (the 3.4 Tcf range by November 2014), storage injections need to average 86 Bcf per week. To note, the highest-recorded average weekly injection number was 80Bcf, in 2003. The market has started to show its doubts by recent price hikes. Producers will need to increase their storage injections during the summer months, increasing demand. In addition, if the hot summer temperatures are above average, we will have another demand component to deal with as electric generators will require additional fuel, with excess demand causing upward price pressure.
This past month we experienced the first storage injections of the season and the first monthly gain of 159 Bcf since the beginning of the heating season. Natural gas in storage is currently at 981 Bcf, almost one Tcf below the five year average figure (50% below) and 790 Bcf below last year’s level (45% below).
Weather forecasts are encouraging for the next 60 days. Temperatures are expected to stay in normal ranges during the next two months with limited seasonal energy demands. If this weather trend proves true and continues into July, we could see a boost in storage injections because production continues to set records. A month ago, NOAA was predicting summer temperatures hotter than normal by at least 5% as they compare to the 30-year average and definitely hotter than last year. Only time will tell.
Natural Gas Production and Pricing
Let’s revisit the facts stated previously: The natural gas storage inventory is the lowest it has been over the last eleven years, check. Current temperatures do not allow for a robust start of the shoulder season injections, check. Industrial demand for natural gas is rising, check. Several nuclear plants are retiring, check. The upcoming summer weather cooling demand is projected to be higher than last year and we have not experienced an active hurricane season for some time, check. Five for five in any other category would have been great but in this case it is of great concern.
Early this week the May 2014 natural gas contract settled at a price of $4.795 per MMBtu, a 5% increase from last month’s figure. The May settlement was 16% higher than last year’s May settlement. The NYMEX natural gas price curve depicted below includes a polynomial trend line curve which continues to show a sustained upward trend. The weather will continue to be the driving factor behind future pricing inclusive of the additional factors listed above.
Despite a great reduction in the active US natural gas rig count (currently at 310 rigs), production is still running at 67 Bcf per day, a record amount. Our actual rig count is down by 59% compared to the five year average of 758 but shale gas is definitely pulling us through with 15.7 Bcf daily coming just from the Marcellus shale.
A positive outcome of the higher natural gas prices is that they have helped reduce demand from power generators by 7% compared to last year. If prices remain at current levels we do not see much switching coming from current coal burning plants.
As of April 24th, 2014 the 12-month average forward pricing curve for natural gas is at $4.74 per MMBtu, compared to last month’s $4.55 per MMBtu price. We do not have anything left in the current heating season, but next heating season of November through March, is at $4.75 per MMBtu.
The effect of the much colder than average temperatures on market pricing is very obvious. Many could say that now is too early to start thinking about next winter season especially after the mess we had to deal with over the last six months, but if the upcoming summer hits the forecasted above-average temperatures with a sprinkle of hurricanes and the current storage situation experiencing levels 50% below the five-year average, we could be heading towards the perfect energy pricing storm.
Some of our clients did take advantage of the low pricing positions back in May/June of 2012 while several clients grabbed the pricing opportunity last fall and secured contracts in order to cover their loads through 2014 and 2015, but those low-priced contracts are coming up for renewal, and they will experience the current market uptrends. Our projection that the natural gas market will stay in the $4.50 per MMBtu range remains, and we still do not expect to see pricing below the $4.00 mark any time soon. Now is the time to start securing loads currently riding variable rates for the upcoming summer, but we are running out of time. Short-term contracts of 12 months or less are currently very expensive, longer term contracts of 24- and 36- month terms offer better pricing blend. The pricing negotiated now could be a bargain compared to what is coming.
The natural gas market has entered a process of setting a long term bottom in prices, consumers spoiled by a few recent years of low energy pricing will have to eventually adjust their expectations and move forward with renewed pricing targets and risk assessments.
Natural gas and electric prices continue to trade higher than last year, as high heating demand and increased industrial demand have contributed to higher pricing. We expect the economy to continue improving, keeping industrial demand going strong, while the 2013-14 heating season could have established the bottom-price thresholds for the remainder of 2014 and beyond.
We expect that the risk of higher pricing for both natural gas and electric supply outweighs any pricing downturn opportunities. For clients still exposed to utility default pricing or variable pricing for both electric and natural gas loads, we highly recommend reviewing your accounts and negotiating for fixed contracts. Capacity charges for next winter are already setting records in the Northeast. Clients should seriously consider securing fixed contracts with longer positions in the market with 24- and 36- month terms, as commodity and capacity pricing tend to stabilize into the future.
As a caution, during energy supply contract negotiations, please make sure capacity charges are included in the price offerings and they are not pass-through. They can be devastating for your budget if not secured. The main concern right now is natural gas storage inventories for next winter. We will know this possibly by the middle of the summer; I would not recommend waiting that long.