Last week we experienced a surprise drop in energy prices, however, there was no stopping the Bulls this week. For this seven-day report period, the average 12-month price for natural gas on the New York Mercantile Exchange (NYMEX) rose 6% closing at $0.405/therm while the 12-month average price for peak power on the PJM also rose 2%.
This week's price spike was easy to understand as heating demand dramatically increased throughout most of the country. According to the Energy Information Administration (EIA), "consumption in the Northeast reached its third-highest recorded November level" on November 18th.
Although winter does not officially start until December 21st, Old Man Winter showed up early this year. The weather gurus reported that more than 50% of the country was covered in snow this week, with many states experiencing temperatures 15°- 30° F below normal. To make matters worse, NOAA's weather forecast east of the Mississippi for the last week of November called for more cold weather. This nasty cold snap gets most of the blame for this week's price increase.
The other variable that supported this week's price surge came in the form of EIA's natural gas storage report. We saw our first withdrawal of the season this week with the EIA reported a withdrawal of 17 Bcf from storage. This withdrawal was 70% larger than the five-year average. The news of the season's first withdrawal helped nudge energy prices up this week.
According to the Bears these price spikes are to be short lived. They argue that the market fundamentals do not support a prolonged price hike. The Bears like to point to the fact that natural gas production is at an all-time high which means we should have plenty of gas to meet the demands of a normal winter.
Additionally, the Bears minimize this week's price increase by referencing the December weather forecast which was just released by Accuweather. This forecast said that beginning in early December, "a milder flow of Pacific air will replace the long-standing frigid air masses. The air will be more concentrated from the Pacific than the pole, which will have a big impact on temperatures across the Unite States." The promise of warmer weather in December helped minimize this week's price increase.
Stay tuned. The fight between the Bulls and the Bears is just beginning. As always, Old Man Winter will play a big role in determining the outcome.