After four weeks of relatively flat pricing, it seems that prices may be moving up. For this seven-day report period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) rose 1.66% closing at $0.4035/therm. Meanwhile, the 12-month average price for peak power on the PJM also posted an increase, closing up 1.32%. This week's price increases can likely be attributed to the surge in temperatures extending from Texas to the Northeast United States and yesterday's underwhelming storage report.
Yesterday, the Energy Information Administration (EIA) reported a respectable build of 75 Bcf in working storage. Though this injection was stronger than the five-year average of 58 Bcf, it still fell short of analyst's expectations of an injection in the 76-80 Bcf range. This smaller-than-expected injection can be linked to increased demand for natural gas at the power plants during this period of hot weather. It appears, at least for now, that prices will continue to be driven largely by a combination of short-term weather forecasts and storage reports.
However, with Labor Day weekend now upon us, and with the end of the traditional injection season within sight, there is another variable that could soon come into play: pipeline capacity. Natural gas production is at an all-time high thanks to the advent of horizontal drilling and hydraulic fracturing in the Marcellus Shale deposits. This is great news considering the increased demand from homes, businesses and power plants (the latter of which now accounts for 31% of gas demand according to EIA). Unfortunately, despite record production levels, pipeline capacity and the number of firm contracts available for transportation remain more or less fixed. In the event of extreme winter weather this could result in many being forced to play the spot-sales game, which as we saw last winter can result in record-high prices. It might be a good time to consider early renewal options to help mitigate potential winter risk.