RD Energy Newsletter: May 2018

May 2018 Energy Update

Key Drivers

  1. After an extended winter, natural gas storage in the U.S. ended up with a 527 bcf deficit
  2. Current storage is 35% lower than last year and 22% lower than the 5 year average
  3. To make up the deficit an extra 5.5 bcf/year will need to be injected
  4. over the 29 weeks
  5. Natural gas production in the U.S. is at historic record levels – 8 bcf/day year over year higher
  6. Natural gas exports to Mexico, Canada increasing
  7. LNG exports increasing as a new LNG plants starts up in April
  8. Natural gas use in electric generation is higher than ever before – how hot will this summer be?

 

Commentary

Why should electric consumers care about natural gas prices? Why do we focus much of our monthly Energy Update on natural gas prices?  The answer is simple: NYMEX natural gas prices are the key driver of electric prices both short and long term.  This means that the laws of natural gas supply and demand is critically important to electric prices and thus electric consumers.

This month we see a very bearish signal for natural gas prices with current production  at an all time high or 8 bcf/day year over year.  At the same time we have several strong bullish natural gas signals.  There is a high natural gas storage deficit heading into the injection season needing 5.5 bcf extra just to make up the deficit, normal natural gas injections, growing natural gas exports to Mexico and Canada, growing LNG exports as more LNG plants come online, a robust economy and the coming summer season with natural gas over taking coal as the primary fuel source for power generation.

Except for the extreme cold in December/January when prices broke out of a tight trading range, natural gas prices have stayed steady with little variation for many months.  The likelihood that prices will break to the downside with the storage deficit in place and with the summer AC season yet to begin is very slim.  The likelihood that prices will break to the upside seems mostly dependent on how hot the summer turns out to be in the Midwest and Northeast.

What we do see is both natural gas and electric prices looking more attractive beginning in 2019 than starting 2018.  Once again, longer term deals are still more attractive than shorter term deals.  Our recommendation to our clients continues to be that we explore prices in the future beyond current contract end dates for both electric and natural gas even if the contract end date in one or two years in the future and see if and how much savings opportunity is available.


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