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September 16th, 2014

Winter 2014/2015 Energy Price Predictions

by Andrew Price, President & COO

Wondering what might be in store for natural gas and electricity prices this winter? The answer depends on a number of factors including weather and location.

For most regions of the US, summer has delivered average or below average temperatures. The relatively cool summer kept a lid on air conditioning demand, resulting in less power generation. In 2013 natural gas accounted for 27% of electric generation, second only to coal at 39%. The importance of natural gas is growing. As old coal fired power plants are retired, they are primarily being replaced by natural gas. According to the EIA, natural gas fired power plants accounted for 50% of all US power generation capacity additions in 2013, followed by solar at 22% and coal at 11%.

The cool summer allowed for a record pace of natural gas injections into storage. Natural gas is produced at a relatively constant rate throughout the year—during the summer production is greater than demand and the excess is injected into storage facilities, during the winter production is lower than demand and the gas that was stored during the summer is withdrawn to meet peak demand. Prolific production in the natural gas shale deposits around the US, coupled with lower summer cooling demand, steadily eroded the enormous storage deficit from last winter. By the end of March 2014, the amount of natural gas in storage was at an 11 year low and 55% below the 5 year average level. By September 5th, natural gas storage levels had rebounded to only 14% below the 5 year average thanks to 21 straight above average injections.

This is great news for energy consumers in general, but the benefit accrues differently depending on the consumer's location. New England, for example, has no natural gas storage capacity. As I have written about frequently in this blog, natural gas pipeline capacity into the region is inadequate to meet peak winter heating and power generation demand. This resulted in shocking spikes in natural gas basis during the 2013/2014 winter for New England energy consumers. Delivered natural gas prices in New England spiked to $80/MMBtu and power prices to $300/MWh during periods when foreign liquefied natural gas displaced domestic pipeline natural gas as the marginal fuel. New York and the Mid-Atlantic PJM Hub had similar winter spikes in power prices.

With several key non-natural gas power plant retirements in 2014—including the Salem Harbor Coal Plant and the Vermont Yankee Nuclear Plant—and no significant improvements to the natural gas pipeline delivery infrastructure, the Northeast could be in for another highly volatile winter. How high prices go will depend largely on what sort of winter shows up. Forward hedge prices for New England natural gas basis during the peak winter months of November 2015 – March 2015 (see below chart) have almost tripled since August of 2013. At almost $11 per MMBtu these basis prices are close to three times the cost of the underlying NYMEX natural gas commodity.

Other parts of the US are dealing with their own unique issues, including a severe drought in California that is reducing hydroelectric generation to levels not seen since 1992.

My forecast for 2014/2015 winter natural gas and power? Volatility.

Relief for energy consumers may come from an unexpected sector. Crude oil prices (both US traded WTI and London traded Brent) are near 2 year lows. Gasoline, heating oil and residual oil prices are following suit. With US oil production set to hit a 45 year high and demand growth slowing worldwide, oil prices are likely to remain in check this winter. 

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