As winter officially arrives tomorrow, cold weather continues to drive demand early in the heating season. This seven-day report period marks the sixth consecutive week of rising energy prices. For this seven-day report period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) rose 0.8% and the 12-month average price for peak power on the PJM rose 0.4%. At first glance, these prices may appear relatively flat compared with the increases we witnessed last week. However, it is important to note that this week's settlement price of $4.46/MMBtu for January 2014 delivery is the highest recorded price in nearly two-and-a-half years (July 20, 2011, to be exact).
The announcement of this week's natural gas storage withdrawal was likely a factor causing this surge in the near-month futures market. This week's withdrawal of 285 Bcf easily exceeded the previous record (274 Bcf) set in January 2008. Again, cold weather across most of the country is largely to blame for this massive withdrawal. The low temperatures that continue to drive the demand for heating have also caused interruptions in natural gas production. During the past few weeks, frozen equipment has stalled gas production in North Dakota, Texas and Oklahoma.
Some analysts have expressed concerns that natural gas prices could approach the $5 mark in coming months if the cold weather and related production interruptions persist. However, other factors could help push prices back down and ramp natural gas production back up to historic high levels. These factors include new supplies of gas from hydraulic fracturing in the Marcellus Shale fields, and the return of warmer weather.
At this point weather is the wild card. The weekend forecast calls for warmer, even balmy temperatures in the mid-Atlantic region to coincide with the winter solstice. However, this warm up may prove short lived. The National Oceanic and Atmospheric Administration's (NOAA) 8 to 14 day forecast predicts the return of colder-than-normal temperatures east of the Mississippi. Stay tuned.