Over the five weeks prior to this seven-day report period, the 12-month average price for natural gas on the NYMEX had risen 20% and the 12-month average price for peak power on the PJM had risen 8.8%. Surprisingly, the upward trend was noticeably reversed this week. For this report period, the12-month average price for natural gas on the NYMEX fell 3.7%, while the 12-month average price for peak power on the PJM fell 1.6%.
We were surprised to see prices fall this week given the fact that weather forecasters were predicting above-average temperatures east of the Mississippi for the next 8 to 14 days. The onset of hot weather usually places upward pressure on prices because the demand for electricity increases as more people turn on their air conditioners.
It will be interesting to see how much the hot weather impacts the natural gas and electricity prices this year as many coal-fired power plants are switching to natural gas fuel. The Energy Information Administration expects coal demand at the country's power plants to decline from 42% to 36% this year. On the other hand, EIA expects electricity generation from natural gas to increase from 25% to 31% in 2012. Increased demand for natural gas could place upward pressure on both electricity and natural gas prices.
Another variable to watch is the natural gas storage surplus. Although storage levels are still well above the five-year average, the natural gas storage surplus has shrunk for the fifth week in a row. Since March 8, 2012, the natural gas surplus over the five-year average has shrunk from 51% to 34.6%.
Natural gas and electricity are two of the most volatile commodities in the world because dp many factors influence the direction of prices. However, one of the biggest variables to watch is the weather. Stay tuned. Summer officially starts on June 20.