Mild Weather Predictions Could Lead to Sharp Decrease in NG Prices
The front-month natural gas contract traded on the NYMEX closed yesterday at $2.159/MMBtu. For the week ending 8/16, stockpiles increased by 59 bcf, which was almost right in line with the 58 bcf expected injection. The total 2,797 bcf of natural gas currently in storage is only 64% of the total 4,373 bcf of storage capacity. The current storage number is also 15.2% above last year’s level for this same week and 3.6% below the five-year average. Prices at the Transco Zone 6 pipeline, which services NYC, increased from $1.92/MMBtu last Wednesday to $2.05/MMBtu this past Wednesday.
Weather temperatures are expected to decrease next week, which will not put upward pressure on natural gas prices, and as a result, electricity prices. Cooling demand in the U.S. is expected to peak at 88 CDDs for this week but fall to 66 CDDs by the end of August. Mild weather is expected in the fall and by mid -October- November, which is typically the beginning of the heating season, this could lead to sharp declines in natural gas and electricity prices.
Natural gas pricing plays a key role in electricity power pricing due to the increasing reliance on natural gas-fired generators as nuclear, coal, and oil generation is retired and mothballed. As the marginal unit of generation, gas prices are directly correlated to power pricing (more so in some regions such as NYC vs. others such as parts of PJM). We keep an eye on natural gas market fundamentals in order to provide insights into forward power pricing for our clients. Gas production is expected to continue to grow, however, there is speculation that demand growth will outpace supply primarily due to LNG and Mexican exports and increased power burn, presenting upside risk to power pricing in the future.