Is the "shoulder season" really here? For the second week in a row, but only the third time in ten weeks, energy prices fell. During this seven-day report period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) fell 2.8%. The 12-month average price for peak power on the PJM fell 1%.
The "shoulder season" is the time of year where you have minimum demand for heating or cooling. This means you can start pumping natural gas into the storage fields instead of burning the gas to meet your heating or cooling demands.
One piece of evidence that the shoulder season has arrived is this week's storage report. This week's injection was larger than expected. Analysts were predicting an injection of 28-32 Bcf. However, we saw an injection of 43 Bcf, which was the largest injection of the season.
This week's surprise injection was large enough to place downward pressure on energy prices. Apparently, storage levels matter. However, if storage levels do indeed impact pricing levels it will be hard to conclude that more price decreases are on the way. The gas bubble from a year ago is gone, thanks to the prolonged heating season. The natural storage levels were 6.2% below the five-year average and 31% below last year's levels.
The next wild card to watch is summer demand. If we have a hot summer and natural gas is directed to the power plants instead of the storage fields, we may see more upward pressure on both natural gas and electricity prices. Hot weather is a big wild card because according to the U.S. Energy Information Administration (EIA), "in recent years, natural gas competed more effectively with coal as a fuel for electricity generation." In other words, more and more power plants are switching to natural gas. Natural gas accounted for 24% of the fuel used by U.S. power plants in 2011 and coal accounted for 43%. However, some studies show that natural gas may soon account for 42% of the fuels used by U.S. power plants .