Creating a baseline for discussions:
When we talk to customers the topic of conversation is typically about current energy prices and where do you anticipate those prices moving. Sound about right? The Energy Monitor will build on topics that will help you discuss the market with a customer and provide you with a means of providing an ongoing discussion.
The most important relationship in the market today is that between the future price of delivered natural gas and the future price of electricity. What has caused this relationship to strengthen is the amount of electricity generation that is now fueled by natural gas. Across the US in 1990 natural gas accounted for 19% of all generation, by 2010 natural gas accounted for 41%. In fact natural gas as a fuel source of generation is now by far the leading source, outpacing coal by 11%.
So as the price of natural gas goes so does the price of power. In fact since this relationship is so strong in future discussion we will be focused on natural gas price movements and their causes with the understanding that the price of power is being likewise affected.
With the groundwork established the Energy Monitor will focus on the economy, weather, supply and from time to time regulatory topics.
NYMEX Natural Gas Market Trend
The graphic above shows the trend of the monthly settlement price on the NYMEX Exchange for Natural Gas at the Henry Hub. Before moving forward lets understand the following. Settlement refers to the process of exchanging future claims to a natural gas contract for the actual commodity. The Henry Hub is a compressor station where nine pipelines meet in Louisiana and therefore makes a good reference point for the industry to discuss the price of the commodity. What is apparent in the graphic is that the settlement price for natural gas has been falling. Contributing to these low prices are continued weak demand from the business sector, a lack of production interruptions (no hurricanes interfered with natural gas production in the Gulf of Mexico), moderate fall weather and an optimistic supply picture. In future issues the weather, production and the economy will be discussed in more detail. For now the Energy Monitor will focus on supply.
Supply and Storage
Natural gas production and supply in the timeframe that prices are being set is unknown. There are simply too many points to monitor to supply the market with information on production quantities. Instead traders and those responsible for creating prices rely on the Energy Information Administration’s weekly announcement at 10:30 each Thursday (with few exceptions) of how much natural gas was injected or withdrawn from storage. If supply is exceeding demand the amount of natural gas in storage builds during the summer or is withdrawn less quickly than expected.
In 2011 natural gas storage reached an all-time high at roughly 3.83 BCf. You will know quickly whether the market is happy or disappointed with the storage announce because the NYMEX Henry Hub price can move dramatically just after the EIA’s announcement.
Boiling it Down
So as the market stands today natural gas and electricity prices represent a buyer’s market. In the very short term colder weather and larger than anticipated withdrawals from storage represent the largest risks. Your prospects should see this as an opportunity to either buy power for as long a term as APG&E will support or if you prospect senses that the market may fall further, then the prospect may want to look a product that floats with the market. If your prospect prefers the latter strategy keep your ears tuned to the market because should prices begin to move higher then you will want your prospect to convert their market based product into a fixed product for either the season or the term.