Market Newsletter – June 2018June 01, 2018
As we move into June and begin to home in on both the summer forecast and the anticipated cooling demand, let’s first review some of the recent activities and their corresponding impact to natural gas and electricity futures.
Last month, I wrote that we should begin to see some “triple digit” injection numbers show up every Thursday morning with the EIA’s natural gas storage reports. While we’ve come close in the past three weeks (91/96/92), we haven’t quite hit the mark just yet. Much of this is due to a historically warm May that resulted in some unforeseen power burn to accommodate the associated cooling demand. So, while injections have been relatively healthy compared to historical averages, and production has continued to set y-o-y records, the substantial storage deficit remains. Even though the amount of natural gas in storage has risen from 1.281 to 1.817 Tcf since the injection season commenced last month, the stocks remain 30.5% below last year’s level and 22% under the five-year average as of week-ending June 1. We are still within the five-year historical range, but should this trend continue for remainder of the summer, we could quickly be at or below the 5-year minimum. A dip below the 5-year minimum would likely be met with a flurry of activity to the upside.
While the EIA forecasts storage inventories will total 3,520 Bcf by the end of the injection season, or 8% below average and 7% below last year’s 3,790 Bcf total at the end of October 2017, LNG exports and pipeline exports to Mexico will likely continue to offset the advances and gains in production. Accordingly, prices for both natural gas and electricity have remained firm. Again, we find ourselves amid a market that will be highly sensitized to weather driven demand, and more specifically, highly correlated to increases in cooling degree day (CDD) accumulation throughout the upcoming summer. Currently, both the 6-10 and 8-14 day outlooks are calling for above average temperatures in the high demand areas of the country. Presently, this is all supportive of the bull camp, but that could change quickly should the predictions of a cooler second half of the summer come to fruition.
In regulatory news, President Trump’s administration continues to push measures geared towards reviving failing nuclear and coal generation fleets. President Trump has now directly requested this from Energy Secretary Perry via a White House memo. While nothing has been officially put in place, most market participants continue to advocate against such a move as it would likely upend competitive markets. In other, albeit related, news, PJM’s latest Base Residual Auction resulted in 25% less nuclear capacity. As a result, capacity costs increased for the majority of the market for planning years 2021/2022.