Spend Matters welcomes a guest post from Mark Eisinger, an economist at IHS.
The buying environment for electricity will remain mostly unfavorable as prices move higher over the next six months. Currently, electricity prices remain elevated for the industrial sector, with prices approximately 26 cents per kilowatt-hour higher on average than last year. The extreme winter weather that emerged in 2014 strongly affected both natural gas and coal markets. The near-term risk continues to depend largely on the severity of the weather, and this will return to the forefront over winter 2015.
According to the National Oceanic and Atmospheric Association, through June, cooling degree days were substantially higher in the South Atlantic and East South Central regions relative to 2013. However, across the US as a whole the summer weather has been relatively normal.
Restocking of North American storage inventory was moderate through early spring as forward prices for natural gas were insufficiently high to spur injections. While dry gas production has since ramped up, storage inventories will enter the winter months well below the five-year average.
Low natural gas inventories had made electricity prices particularly sensitive to the severity of the summer weather—especially amid heightened concerns over the adequacy of current coal inventories held by the electric utility sector. While the weather has not fully exacerbated this risk thus far through the summer, concerns will return to the radar as we approach the winter months, particularly in the rail transportation constrained Powder River Basin.
According to the Energy Information Administration (EIA), through June, electric utility coal stockpiles are down 25 percent from a year earlier. At one point earlier this year, filings to the Surface Transportation Board had indicated that there were power plants with fewer than 10 days of coal inventory. Had cooling degree days strengthened markedly, the constraints on coal-fired generation would have placed further onus on depleted natural gas inventories, but a mostly mild July helped to alleviate fears of any immediate coal stockpile shortages.
With the summer months nearly in the rear view mirror, all eyes will turn to what will be a very interesting winter. Even with current injection rates, the end-of-October storage inventory will fall short of the five-year average and will in turn offer upward support to gas and electricity prices. A moderately severe winter could again lead to scarcity pricing, not dissimilar to what happened in February and March of this year when the EIA’s weekly storage withdrawals report brought steep changes to the Henry Hub spot price. The bottom line – more poignant than in years past, the weather is going to drive the risk premium over the next six months and the probability of an unfavorable price profile for buyers is uncomfortably likely.