Market Newsletter – January 2018January 01, 2018
We have finally entered 2018 after a 2017 Q4 that was largely characterized by a lack of volatility and downward price pressure – a result of depressed demand in the face of record-setting domestic natural gas production. Seemingly on cue, winter finally took hold of both the weather and the corresponding price trajectory in the final week of the year as freezing temperatures gripped much of the country for a two-week period and Real-Time commodity prices reached levels we have not witnessed since the polar vortex of 2014. During this time, we saw five consecutive trading sessions where the prompt trading month settled higher than its previous mark, generating a swirl of excitement within the bull camps, though it appears to have been short-lived. Weather forecasts for the remainder of the month point to a sustained thaw that should once again keep demand for natural gas flat (or seasonally depressed), both from a heating perspective and as a generation source for electricity. Even with expectations for the largest storage withdrawal ever this Thursday (~340 bcf), the needle refuses to move convincingly in the bull’s direction considering the recently adjusted January forecast.
While demand and production continue to duke it out and shape the day-over-day price movement, we can continue to expect a highly weather-sensitized market that will be susceptible to short-term volatility. We should expect to see both power and natural gas prices remain relatively flat for the next few weeks, with a potential for somewhat limited downside movement if there are no major adjustments to the longer-term weather forecast.
From a regulatory perspective, this recent cold snap and the corresponding closure of the Pilgrim nuclear plant in MA (728 MW) due to unavailable transmission lines, highlights a very important issue for us all to consider in tandem with the DOE’s presently proposed Grid Resiliency Pricing Rule. The Notice of Proposed Rulemaking (NOPR) argues namely that coal and nuclear-powered plants are our most “resilient” generating resources and should therefore be compensated in a differing fashion than all other market participants. Despite these considerations, this particular weather event highlighted that (1) “resiliency” is as much about the transmission of reliable power as it is the generation of it and (2) it is equally important to have reliable grid operators (ISOs) that can effectively meet demands of the system through the availability of additional generating resources that are flexible (dual fuel) and/or intermittent (wind). The argument can be reasonably made that this NOPR is more political than economical and has less to do with grid resiliency than it does with selectively propping up certain generating assets at the expense of the utility customer. Both sides of this conversation will undoubtedly continue to dominate the first half of 2018.