Although natural gas and electricity prices decreased during the two week period of February 24, 2012 to March 8, 2012, prices unexpectedly rose this week. For this seven-day report period, the 12-month average price for natural gas on the NYMEX rose 3.7% and the 12-month average price for peak power on the PJM rose 3%.
It is hard to explain this week's price increase given the fact that the gas surplus is now 51% greater than the five-year average and unusually warm temperatures are predicted for the next week. We are assured of ending the traditional withdrawal season on March 31, 2012 with a record gas surplus in storage.
Despite this week's price increase, natural gas and electricity prices are still trading near a ten-year low. It is easy to explain these low prices when you look back at our winter temperatures. This was one of the warmest winters on record which minimized the demand for natural gas heating. In fact, November weather was 21% warmer than normal, December weather was 22% warmer than normal, January weather was 17% warmer than normal, February was 18% warmer than normal, and the weather during the first 15 days of March was 37% warmer than normal. Low heating demand leads to low prices.
Where do prices go from here? Is this the bottom? One area worth watching is the fuel switching that is occurring at the U.S. power plants. According to the U.S. Energy Information Administration, "coal-fired generation decreased in favor of natural gas in all regions in December when compared to December 2010. In all regions natural gas is replacing coal as the fuel used in electricity generation."
If the weather stays unusually warm, and the natural gas-fired generators are needed to meet the air conditioning demands this summer, we may begin to see some upward pressure on prices.