For the third week in a row, both natural gas and electricity prices closed relatively flat. During this week's seven-day report period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) rose less than 1% and the 12-month average price for peak power on the PJM rose less than 1%.
Prices are range-bound and continue trading near their second lowest level in nine years. Prices are low because supply is high and demand is low, at least for now. Where do prices go from here?
On the supply side, the natural gas storage fields are 1% above the five-year average. Additionally, natural gas production numbers are at an all-time high. The last time production numbers approached today's levels was between 1970-1977. These high supply numbers have kept a lid on energy prices.
However, on the demand side there are a few variables that could begin placing upward pressure on energy prices. First, as always, there is the weather. According to the Farmers Almanac, 66% of the nation is expected to experience below average temperatures during the winter of 2013-2014. Unusually colder weather tends to place upward pressure on energy prices.
A second wild card to watch on the demand side is the export of liquefied natural gas (LNG). According to a recent article in the Washington Post, the U.S. Department of Energy just approved a "Dominion Resources proposal to export liquefied natural gas from Maryland's Western Shore, a plan that would tap into the surge in domestic production of gas extracted from shale. Dominion's approval is only the fourth such authorization the federal government has granted and the third since May." The concern is that the export of our domestic gas supplies will create a new demand component, likely placing upward pressure on natural gas prices.
The immediate question for now is whether these factors will create an energy price rally as we head into the winter heating season. It may be difficult for energy prices to sustain a major rally during the next few weeks because we are entering the "shoulder" months, with minimal demand either for heating or cooling. However, price volatility is likely to return as soon as we get our first cold weather forecast, or in the event that a fifth LNG export facility is approved.