Energy Market Update-October 2018
Edge Insights energy experts are constantly monitoring energy market conditions in order to help ensure the best possible pricing and contract terms for our clients. The following report is a snap shot of current conditions intended to help our clients stay informed of market dynamics.
Natural Gas Market Overview:
(Natural gas is used to generate about a third of U.S. electricity, so the technical & fundamental analysis of the gas market directly relates to the cost of electricity)
There are two components of a natural gas supplier price, Basis and Commodity. Basis has increased in the northeast substantially from last year at this time, while the commodity remained low. The reason for this is due to rising demands for electric generation, and LNG exports. The volume of gas being piped away from the northeast increased rapidly over the past few years.
Gas storage levels are well below normal, and we are starting to see the market react and push prices higher. Injections are expected to be larger over the coming weeks while in this low demand time of year, however estimates of end of season storage levels have some analysts very concerned that we may experience another depletion as we have seen 2014, after the ‘Polar Vortex’ winter.
The EIA has released the heating degree day forecast for this winter. The total on the right is showing the expected total heating to be very close to last year, with February being the coldest.The chart below shows the near and future years natural gas average 12 month pricing. The 12 month strip has remained below $3 since February, and the distant years though 2022 may have reached a bottom.
Octobers’ market price settled on September 26th at $3.021/MMBtu, moving up 12.6¢ from last month.
Current Market Movers:
Bearish: (lower prices)
- Reduced demand for cooling during the fall season.
- A mild El Niño weather pattern is in the forecast, which allows for warmer winter conditions across the northern tier of the country. This is expected to weaken towards spring, and may not be strong enough to hold off polar Jetstream dips.
- LNG Exports to China decline taking only 4 vessels since June versus 17 for the same period last This reduction is temporary, as other countries such as South Korea will fill the void. South Korea has entered into a long term contract with Cheniere Energy.
Bullish: (higher prices)
- Natural gas storage levels remain well below the 5 year average range. Investors are eyeing potential record low levels by end of March 2019.
- LNG Exports get the go ahead from FERC at Freeport, TX, which will begin shipping the 3rd quarter of 2019. As new LNG exports come online, production must fill the gap, increasing demand on the pipelines.
Price Stabilizer: (controls price range)
- If gas market prices continue upward, we will see a reduction in the amount of gas used to generate electricity and replaced with low cost coal.
- This time of year, many nuclear power plants shut down for maintenance. They come back online as we move closer to heating season.
Natural Gas Storage Update:
The storage report for week ending 10/5 shows an injection of 90 Billion Cubic Feet (Bcf). This puts levels at 17% below the 5-year average by 607 Bcf, and 627 Bcf below last year at this time. Current percentage of total capacity is now at 67.6%. Injections over the past 4 weeks were below average, with the two most recent injections being slightly above.
U.S. crude oil inventories at Cushing, Oklahoma, fell by more than half in the past year
Release date: October 3, 2018 by The U.S. Energy Information Administration
Crude oil inventories held at Cushing, Oklahoma, decreased by more than half since this time last year, recently falling to lows last reached in 2014. Logistical factors and strong demand for crude oil from both domestic refining and exports markets have contributed to the steep year-over-year decrease. Because inventories can satisfy either current or future demand, their levels are also sensitive to the relationship between the current price of oil and the expectations of future prices. Since October 2017, the forward curve of West Texas Intermediate (WTI) futures prices has been in backwardation, where near-term deliveries are priced higher than long-term deliveries.As of September 28, 2018, crude oil inventories at Cushing were 24.5 million barrels, which is 22.1 million barrels lower than at the start of the year and 21.8 million barrels lower than the hub’s five-year (2013–17) average for this time of year (Figure 1). The relatively low level of crude oil inventories at Cushing does not indicate scarcity of crude oil in the United States. Total U.S. commercial inventories and Midwest (Petroleum Administrative District for Defense, or PADD, 2) inventories, excluding Cushing, have not decreased at nearly the same rate as inventories at Cushing. Total U.S. inventories are 87,000 barrels lower than their five-year average of 404.1 million barrels.
For the complete article, visit https://www.eia.gov/petroleum/weekly/archive/2018/181003/includes/analysis_print.php
Short term electric and gas contracts are poor. However, long term is a good buy and should be considered if renewing contracts.
If considering a new gas term, hedging out to 2021 or 2022 for the best price is suggested.
The market opportunity is a ranking of how we perceive timing of contract purchases for natural gas or electric. Information provided by the Energy Division of Edge Insights, Inc.