Last week, we reported that energy prices traded flat which ended a six week trend of price decreases. As you may recall from June 12, 2014 - July 31, 2014, the 12-month strip price for natural gas on NYMEX dropped 16% and the 12-month average price for peak power on the PJM dropped 13.6%.
However, for this seven-day report period, energy prices rose for the first time in eight weeks. The average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) increased by 1.2% closing at $0.394/therm, while the 12-month average price for peak power on the PJM also rose 2%.
It is hard to explain why prices ran up this week. The NOAA (National Oceanic and Atmospheric Administration) forecast calls for below average temperatures east of the Mississippi during the third week of August and natural gas production is at an all-time high. This news would normally be enough to place downward pressure on prices.
Let's look at production. Due to the shale gas phenomenon, natural gas production continues to be at an all-time high. It is interesting to note that the largest shale production is coming from nearby West Virginia and Pennsylvania. According to an EIA report released on August 5, 2014, "the natural gas production in the Marcellus region exceeded 15 billion cubic feet per day (Bcf/d) through July, the first time ever recorded. The Marcellus Region, mostly located in West Virginia and Pennsylvania is the largest producing shale basin in the United States accounting for almost 40% of U.S. shale gas production. Marcellus Region production has increased dramatically over the last four years, increasing form 2 Bcf/d in 2010 to its current levels." Robust supply reports normally place downward pressure on energy prices.
Perhaps prices rose this week because the marketplace decided to focus on the natural gas storage fields instead of the weather forecast and gas production. The natural gas storage levels are 20% below the five year average and this fact may have been enough to place some upward pressure on prices.
Additionally, some of the upward pressure could have come from the energy reports that offered evidence that the industry does not currently have enough pipeline capacity to get the bulk of the Marcellus production to the marketplace.
For example, according to another recent EIA report, the "rising production in the Marcellus Region has outpaced growth in the region's pipeline capacity, which has resulted in multiple pipeline expansion projects focused on removing bottlenecks in the Marcellus Region."
Stay tuned. Some analysts think another story could be on the way. Analysts are reporting that natural gas prices are now low enough to entice the power plant operators to switch their base load requirements from coal to gas. This switchover would make it difficult for energy prices to continue their downward trajectory if hot weather makes a late appearance.
Weather is the still the wild card. Energy prices are currently trading at an attractive level. This may be a good time to consider an early renewal strategy.