Although natural gas and electricity prices were relatively flat during the prior two-week period of June 6 through June 20, the bears made a run this week. For this seven-day report period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) fell 6%. The 12-month average price for peak power on the PJM fell 4%.
The two variables credited for this week's price drop were storage and weather.
On the natural gas storage side, this week's injection was 95 Bcf. Last year at this time we saw an injection of 58 Bcf. Thanks to a recent run of larger-than-normal injections, the storage deficit has continued to shrink. We are now only 1.2% below the five-year average. The larger-than-expected injection placed downward pressure on energy prices.
On the weather front, the National Oceanic and Atmospheric Administration's 6-10 day outlook for July 3-7, 2013, called for cooler-than-normal temperatures east of the Mississippi. Cool weather means more natural gas is available for injection into the storage fields. Large injections reduce the storage deficits and tend to place downward pressure on energy prices.
Do not be lulled to sleep however. Summer has just started and hot weather is on the menu. The reason that hot weather impacts energy prices is because more and more power plants are consuming natural gas to meet the country's air conditioning needs.
According to the Energy Information Administration (EIA), "the consumption of natural gas by electric power generators has been increasing each year since 2009 as lower natural gas prices allowed natural gas fired generators to compete with coal fired generators."
For the period of 1990-2010, coal fired generators produced approximately 50% of the country's mid-summer electricity. During the peak summer months of 2012, coal produced only 39% of the country's electricity. The facts indicate that natural gas demand at the power plants is increasing. This means a hotter-than-normal summer can impact energy prices more than ever before.