Is the downward trend over? For the first time since December 1, 2011, both natural gas and electricity prices have made upward moves. For this seven-day report period, the 12-month average price for natural gas on the NYMEX rose 10%. The 12-month average price for peak power on the PJM rose 4%.
Three variables deserve some credit for this upward move in prices: the economy, the storage fields, and production.
First, the U.S. Commerce Department announced that the economy was doing better than expected. During the fourth quarter of 2011, the U.S. gross domestic product grew at a 2.8% annual rate, which was the best growth experienced in one-and-a-half years.
Second, the natural gas storage withdrawal was much higher than expected. The U.S. Energy Information Administration (EIA) reported the largest withdrawal so far of this winter season. We saw a triple-digit withdrawal of 192 Bcf., which was even larger than the five-year average of 173 Bcf.
Third, but most significantly, we saw a big name producer announce a "shut-in." On Monday, Chesapeake Energy announced it was reducing its dry gas drilling activity by 50%. The CEO of Chesapeake Energy said that "[a]n exceptionally mild winter to date has pressured U.S.natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S."
Are prices at the bottom? Will weak prices prompt more producers to shut-in their gas wells? For now, prices are trading at very attractive levels. This is still a great time to look at the early renewal strategy.