It is hard to believe that natural gas traders and analysts remain bearish given current prices. But the amount of gas being produced is outpacing demand and continues to place downward pressure on prices.  This supply and demand imbalance has caused both short and long-term gas prices to tumble.   Prices for both the January 2020 contract and winter strip (Jan 2020 – Mar 2020) have dramatically fallen over the last month.   Figure 1 shows how gas prices for the January contract rallied through the fall, reaching its peak of $2.94/MMbtu on November 5^th and then settled at $2.22/MMBtu on December 9^th – a decrease of nearly 25% in four weeks.   Prices for the winter strip have followed a similar trend.   Figure 2 shows longer-term market movements in gas futures since November.  The blue bar in Figure 2 is the price for the January 2020 gas contract and calendar years 2020 through 2024 on November 5th.  The black bar shows how those same contracts were trading on December 13^th.   While the biggest decrease was in the January contract and in calendar year 2020, prices fell across all calendar years to 2024.

This past August, electricity prices in Texas hit historic highs over several days.  Prices rose from the typical range of $20 to $30 per MWh to $9,000 per MWh during the second week of that month.  Figure 1 shows daily prices during the week of August 12, 2019.

Natural Gas basis prices for the winter of 2019/2020 have decreased by 28% since the middle of October.  Figure 1 shows how the basis price for this winter started to rally in August, reaching its peak of $2.90/MMbtu on October 16^th.  Most believe that the strong rally was due to the TETCO natural gas pipeline explosion on August 1^st near Danville, Kentucky.  In the wake of that accident, the amount of natural gas moving through that pipeline was reduced by 15%.   The reduction in gas volumes along this major interstate pipeline, which supplies the Northeast, had a bullish impact on basis prices for this winter, which rallied through September and early October.

Anyone from New York knows that New York is really made up of two states: upstate and downstate.  Some will even put a finer point on this and claim that New York City is distinct from downstate and the same can be said of New York’s electricity markets.  Today, there are two factors that have a significant impact on the price of electricity throughout New York.  One of those factors is tied to regulatory developments in Albany and the other is connected to the way capacity has been trading across the state.

New York City’s Climate Mobilization Act, especially Local Law 97, sparked the creation of generic carbon calculators for buildings to assess occupancy class and emission limits. Although intended to be helpful, not all are accurate.

In commodity markets, a bear market cannot stay bearish forever. Typically, a commodity market does not stay in backwardation (where prices get cheaper into the future) for long. The forward electricity markets in Texas have been in a backwardated state for a while as prices in the outer years have been steadily falling. However, it seems as though the market has found a support (floor).

Over the last few years, natural gas has become the fuel on the margin, meaning that the price of natural gas becomes the driver for wholesale electricity prices.  Supplies of natural gas and the delivery systems necessary to transport that gas are both important factors that influence the price of electricity.  Given the size of PJM, it should not be surprising that the forces affecting electricity prices in the eastern portions of PJM are different from those affecting prices in the western part of PJM.  In August, a major interstate gas pipeline on the TETCO system in rural Kentucky exploded. Electricity markets in the eastern and western parts of PJM had significantly different responses to this explosion.

This week, a major milestone was reached in the natural gas market. For the first time in two years, the amount of natural gas in storage has exceeded the 5-year average. In Figure 1, the 5-year range of minimum and maximum amounts of gas in storage are shown in the area shaded in gray. The darker blue line is the 5-year average and the red line shows the amount of gas currently in storage. This chart shows that storage levels have been below the 5-year average for the last 25 months. At this time last year, the nation headed into winter with approximately 3,200 Bcf of gas in storage, roughly 15% below the 5-year average.  

In New York, natural gas is the new front in the war on climate change. While natural gas is much cleaner than coal, environmental groups argue that expanding natural gas infrastructure (building pipelines that transport gas, new gas power plants, and/or new buildings that use natural gas) will result in increases in upstream methane emissions and dampen efforts to switch to carbon free sources.  Due in part to environmental opposition, permits have not been granted for the construction of the infrastructure needed to support increased usage of natural gas.  As a result, in certain parts of the State, the natural gas infrastructure cannot support new natural gas demand. 

Since fall officially arrives next week, we‘d like to review what happened in New York’s energy markets over the summer.  Two stories are worth mentioning:

• Peak electricity demand in New York, which sets all business’ capacity obligations, likely occurred over the weekend of July 20, 2019
• Low spot natural gas prices kept Real-Time electricity prices in check all summer throughout the state