Natural Gas Storage
Biggest Injection of the Season - Market Unchanged
It’s early in this year’s injection season, but last week EIA reported an injection of 106 Bcf, outpacing expectations by 10%. The strong addition to stockpiles helped move levels to 10% over the 5-year average, but still 11% under this time last year.
The good storage news caused prices to immediately drop about 3¢, though the price drop was short-lived as the markets closed up 8¢ to $3.028/MMBtu. High temps in the Midwest and Northwest offset the storage news and pushed prices back over the $3.00 threshold.
The battle of market factors -- storage injections vs. high temperatures -- may continue all summer. With above normal temperatures predicted for the entire summer, we hope natural gas production and drilling increases to offset the temperatures and demands of natural gas power generation.Electricity generated from natural gas accounted for the largest share (33.8%) of total U.S. power generation, surpassing coal's share (30.4%) for the first time. This fundamental change in generation fuel sources will forever impact the longer-term trends in the electricity supply market as well as natural gas injection levels.
Weather Forecast: Border Regions Will Feel the Heat this Summer
In June, NOAA forecasts normal temperatures throughout all interior states with some below normal temperatures in the central rockies. All west, east and southern border regions are expected to experience above or well above normal temperatures.
The 90-day outlook looks similar to the May outlook with the exception that the above normal temperature region has expanded significantly into the center of the country.
We Are in a Price Dip
July NYMEX prices are trading at $3.04/MMBtu, down substantially from last month’s report of NYMEX which set a new high price for the year of $3.43. Since last month, all strip prices are lower: 12-month strip prices are $3.11 down from $3.40; calendar year 2018 is down to $3.035from $3.13; and calendar 2019 is still under the $3.00 mark at $2.87.
If you haven’t already, you should consider taking advantage of this dip in the market and lock into a long-term fixed price.
Power prices typically mirror natural gas prices with a slight lag in market timing. The good news is power prices experienced a similar dip last week as natural gas prices. The bad news is electric capacity prices have gone up significantly. In PJM (regional transmission operator for Pennsylvania, New Jersey, Maryland, as well as Delaware, Ohio, DC and parts of Illinois and Michigan), capacity prices through 2021 on average are 145%. What that means to a typical 50% load factor customer is that their capacity price was $0.64/kWH and is now at $1.57/kWH.
After the electric generation commodity itself, capacity is the next largest component in the cost of electricity. Capacity is critical because it ensures that there is adequate electric generation to supply energy to every user during the most extreme usage periods (System Peak Hours); typically the hottest day of the year when everyone’s AC is running. As energy demands grow in a region, the generation supply begins to erode and new generation must be built in order to provide adequate supply in the future. Capacity was developed to incent investors to build more generation plants (assets) and keep the supply and demand curves in balance. Generation owners are paid for their plant’s capacity regardless if the plant ever generated any energy.In the event that market prices drop making the generation plant uneconomical to operate, the asset owners are still paid capacity charges to offset some of their investment risks. Capacity prices are set by the regional transmission operators and are not negotiable. Every customer must pay the same price. The only way to reduce your capacity costs is to curtail usage during the system peak hours.
Natural GasPricesHave Momentarily Dropped
Stronger than expected storage injections have driven prices lower, at least for the moment. Unfortunately, a few factors are working against us:
- Temperatures are predicted to be above normal, which will push prices upward
- This last month, 4,800 MW of new gas fired generation went on line
Usually, adding new generation is a good thing, but since it burns natural gas we should expect to see new gas production diverted away from storage and into the new power plants. Lower levels of gas injected into storage will drive next winter’s gas prices higher. Our best hope to keep energy prices lower is an increase in natural gas production (new drill rigs, more fracking, and more horizontal boring).