During the three-week period of January 18 to February 7, 2013, natural gas and electricity prices were trading in a tight range. Last week, prices made a small downward move but were unable move downward for a second week in a row. For this seven-day report period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) rose 1% and the 12-month average price for peak power on the PJM rose by 1%.
If you view the graphs elsewhere in this issue, you will notice that both natural gas and electricity prices have traded in a relatively tight range since October 1, 2012. However, at the end of this period, the Bears won as natural gas prices decreased by 6% and electricity prices dropped by 4.6%. Energy prices are trading near their second lowest level in ten years.
Natural gas and electricity prices continue to trade at these very attractive levels because natural gas production is surprisingly high. Since January 2010, the total U.S. average daily marketed natural gas production rose from 60 Bcf/day to 70 Bcf/day according to the U.S. Energy Information Administration (EIA).
We are surprised that production has increased because the vertical rig count for oil and natural gas has actually decreased in the lower 48 states. The vertical rig count for oil and natural gas dropped from 617 rigs at this time last year to 429 rigs today. How can natural gas production go up if the vertical rig count goes down? The answer to this question can be found by comparing the vertical rig count to the horizontal rig count. Although the vertical rig count for gas and oil is down 30%, the horizontal rig count remains steady at 1,139 rigs. The horizontal rigs which are used to pump natural gas and oil out of the shale formations, are much more productive than vertical wells because fewer wells are needed to contact the formations. These horizontal rig counts have not dropped like the vertical rig counts and are keeping natural supplies at robust levels.
For now, natural gas and electricity prices are trading at these low, attractive levels because supplies are high thanks to shale gas. As power plants and industrial users start switching over to low-priced natural gas, we may experience some upward pressure on pricing.
As we note every week, the weather is always a factor that can impact energy prices. The 14-day extended forecast from AccuWeather for the Washington, D.C. region is available here.