NYMEX Natural Gas Futures Market

Transcription

1 After an extended rally through late May and early June, natural gas prices fell significantly in recent weeks, resulting in prices reaching or nearly reaching all-time lows for the the strips. The remainder of the 2011 strip did not fall all the way back to the $4/MMBtu mark of early March, but did drop more than 12% from $4.968 to a low of $4.351/MMbtu by July 6 th. A primary driver of the bearish market activity is the relatively bleak economic outlook. The Labor Department announced on June 3rd that the economy added 54,000 jobs in May, down significantly from 232,000 in April and well below estimates of 170,000. Natural gas prices and the stock market fell on the news. June employment data is due out this Friday and is predicted to be slightly higher, but still a generally modest figure of 100,000 to 115,000 according to Bloomberg and MarketWatch. The effects of the slow employment growth were compounded by comments from Ben Bernanke who confirmed, three days later, that the economic recovery had slowed. The Fed Chairman did not announce any additional stimulus, confirming that QE2 would be the end of the Fed s program to buy government debt. The end of the Fed s stimulus JULY 6, 2011 Breaking News (July 7 th ): Today s EIA natural gas storage report indicates a weekly storage build of 95 Bcf, significantly above expectations for an 81 Bcf injection. 2011/2012 NYMEX prices quickly fell almost $0.10/MMBtu in early trading. This follows significant reductions yesterday, including a prompt month price drop of more than $0.12. NYMEX Natural Gas Futures Market NYMEX Natural Gas Strip Price, $/MMBtu Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 NYMEX Nat. Gas Strip - HH Current Price likely reduced expectations of economic output and resulted in a further decrease in natural gas prices. This announcement also helped moderate oil prices as it reduced the expectations of inflation that had contributed to the increase in the price of dollar-denominated crude. In addition to the poor economic outlook, moderate temperatures across much of the U.S. contributed to the reduction in cooling related demand. This was confirmed by the EIA storage data released on June 9 th and 23 rd that reported larger than expected storage injections, indicating that the oversupply of the U.S. natural gas market is continuing to outstrip analyst expectations. Given the significant uncertainty in the overall economic outlook, look for prices to react more significantly to economic indicators than usual in the coming months. Furthermore, this current uncertainty is coming during an already volatile period for gas prices heavily influenced by hot summer temperatures and the threat of hurricane activity in the Gulf of Mexico. Trading Date Prior Month Avg. Prior Month High 2011 (rem) Strip 2012 Strip 2013 Strip 2014 Strip Prior Month Low Prompt Month $4.234 $4.444 $4.885 $4.234 Cal 2011 (remain) $4.359 $4.550 $4.968 $4.359 Cal 2012 $4.758 $4.875 $5.188 $4.719 Cal 2013 $5.137 $5.192 $5.398 $5.039 Cal 2014 $5.400 $5.456 $5.587 $5.341 * Prior twenty-two trading days used to represent "prior month" prices

2 Weather Outlook While long-term forecasts continue to predict moderate temperatures throughout the summer in many of the primary consuming regions - including the Eastern Seaboard and the Midwest - recent temperature increases have put some positive pressure on near-term prices. Absent other price drivers, it is generally recommended that longterm hedges are not made during the middle of a summer heat-wave. While long-term prices should be relatively insulated from near-term weather, there is often a diminishing, but correlated change in prices well into the future. Source: NOAA Climate Prediction Center Date Range: July 10-14, 2011 Date Range: July-September, 2011 Forecast Date: July 4 th Forecast Date: June 16 th Last week also saw the first named storm of the 2011 Atlantic hurricane season. Tropical storm Arlene developed over the western Gulf of Mexico and made landfall near Cabo Rojo, Mexico. The storm brought torrential rain, flooding and sustained winds of 65 mph to the region, but did not affect any of the natural gas infrastructure in the Gulf of Mexico. At this time, there are currently no active tropical storms in the Atlantic. Natural Gas Storage While the EIA natural gas storage reports seem to illustrate a steady storage build, recent storage reports have resulted in significant price swings in the NYMEX futures market. This is generally a result of variations from analyst expectations. Analysts and traders create pricing models around their assessments of supply and demand, which translate into their expectations for changes in the amount of gas stored in U.S. storage facilities. When official storage data disagrees with analysts expectations of the storage build, pricing models are quickly corercted which can lead to sharp price swings in the future s market. For example, the June 23 rd report indicated a storage build of 98 Bcf, which was significantly less than the analysts consensus expectations of ~89 Bcf. The excess gas put into storage suggested that demand for gas was less than the predictions used to develop analyst and traders storage and price expectations. Once the market adjusted to the new information indicating reduced demand, prices fell $0.088/MMBtu on the day. This was consistent with the expected pricing behavior: storage builds that are below expectations (or storage withdrawals that are above expectations) indicate increased demand and lead to price increases; storage builds that are above expectations (or storage withdrawals that are below expectations) indicate decreased demand and lead to price decreases. Source: EIA Gas Storage Report, 6/30/11

3 Comparative Energy Price Analysis NYMEX Futures Contracts CSX Coal ($/short ton) Historic Energy Price Comparison Current Price Prior Month Avg. Prior Month High Prior Month Low $79.09 $75.85 $79.48 $72.86 After a relatively consistent increase since early 2011, oil prices retreated in the past two month to prices back below the $100/bbl threshold. A few macro-economic drivers are behind this price reduction, including the Fed s announcement that there would not be a thirdround of quantitative easing, which has had a positive effect on the strength of the U.S. dollar over the past month (and hence a negative effect on the price of oil). Since the 2011 low in January, the dollar has appreciated ~8% against the Euro, reducing the inflationary pressures that were contributing to broad price increases across the commodities markets. Recently the IEA s announcement that member nations would release 60 million barrels of sweet crude into the market also resulted in a price drop in the oil markets. Lastly, the sovereign debt problem in Greece (and the U.S.?) has not provided positive feelings about the global economy. HH Natural Gas WTI Crude ($/barrel) $4.266 $4.447 $4.885 $4.252 $96.83 $95.54 $ $90.77 Heating Oil $2.954 $2.960 $3.136 $2.769 ($/gallon) * All prices are for prompt month contracts / Prior 22 trading days used to represent "prior month" prices Domestically, the price for Central Appalachian coal has been increasing slowly and steadily in recent months. It should be noted, however, that while Central Appalachian coal is currently at price parity with natural gas, there remains a significant price advantage for other types of coal, including Illinois Basin and Powder River Basin coal (PRB coal is currently priced at ~$2.75/MMBtu). A major variable currently affecting longterm natural gas prices is the uncertainty surrounding the economic recovery, both in the U.S. and globally. Illustrating the long-term impact of economic factors, the 2013 and 2014 strip prices experienced sustained price reductions throughout much of June the most consistent price drop in more than 6 months, with the 2013 strip nearly breaching the $5.00 mark. This period of economic uncertainty may offer an opportunity to fix a portion of one s long-term exposure, especailly for those end-users who are employing a long-term, layered hedging SourceOne Natural Gas Pricing Outlook Natural Gas Market Drivers Near Term Medium Term Long Term Production Demand Storage Weather Economic Factors Regulation Up arrows indicate factors that have a positive or bullish effect on prices in the given time frames Down arrows indicate factors that have a negative or bearish affect on prices. strategy. While there is room for continued price reductions down to 2010 and 2011 levels: $4.40 and $4.31 (projected) srtip prices, we continue to believe that multiple factors are providing pricing resistance against significantly lower gas prices. These include the potential for coal-gas shifting in the power industry (driven by both price and regulatory activity), break-even prices for shale plays, and the oil-gas price ratio that is focusing development investment on crude exploration.

4 News of Interest Entergy Nuclear Site Licensing Entergy, which is the second largest nuclear plant operator in the U.S., continues to struggle with the relicensing of two of its nuclear sites in the Northeast. Vermont Yankee (620 MW) and Indian Point in NY (2,045 MW) are both nearing the end of their initial 40 year operating license and have strong opposition from their respective states regarding licensing extension. The operating license for Vermont Yankee expires in March 2012 and Indian Point's licenses expire in 2013 and Entergy is seeking to extend all three licenses by 20 years. These relicensing struggles contributed to a recent S&P downgrade on Entergy due to the nuclear unit's contribution of about 30% of the Entergy's overall earnings. Barclays Capital lowered Entergy's price target to $75 from $83 due to the uncertainty of Indian Point - which it assumes has a 50% likelihood of being forced to shut down. Indian Point's proximity to the NYC metropolitan load center makes it an extremely valuable asset for Entergy and an important component for minimizing electricity pricing and providing grid stability for NYISO. Indian Point has had long standing arguments with some state politicians and environmental activists regarding the safety of a nuclear plant 40 miles from NYC - which have increased in light of the recent accident at Japan's Fukushima Daiichi plant. Many of the state level relicensing discussions have centered on the plant's need for a water quality permit for discharge into the Hudson River - without which Entergy may need to invest $1.5 - $2 billion for cooling towers for continued operations. Governor Andrew Cuomo (D) has repeatedly stated his position that he would like to see the plant shut down. While the smaller Vermont Yankee site has less of an impact on Entergy's earnings than Indian Point, the nearer relicensing term has resulted in active lawsuits in advance of the March 2012 license expiration. Entergy has filed a suit in US District Court against the state of Vermont arguing that licensing jurisdiction solely belongs to the federal government and that the state is in violation of the Atomic Energy Act of 1954 which states that a "state may not interfere with the federal government's exclusive authority over the operation of a nuclear power plant". Vermont is the only state in the U.S. that requires legislative approval before state regulators are able to grant a nuclear plant permission to continue operations through the issuance of a Certificate of Public Good that is necessary for the site to continue running. Absent an injunction issued by the District Court or other court actions, the Vermont State Legislature is effectively required to actively confirm the relicensing process for the site to continue operating past March 21, 2012 even though the Nuclear Regulatory Commission has approved a 20 year license extension. Governor Peter Shumlin (D) says that the state has no plans to revisit this legislation. He is supported by Senator Bernie Sanders (I) who said that federal preemption in this case only extends to issues of nuclear safety and not economic factors that allow a plant to be built or continue operating. It is notable that when Entergy purchased the Vermont Yankee site in 2002 for $180 million, Entergy agreed to obtain permission from the state before operating it beyond the current license expiration in NY Times article on Shale Gas A recent front page article in the NY Times titled "Insiders Sound an Alarm Amid a Natural Gas Rush" (Sunday, 25 June 2011) that questioned industry forecasts of shale gas production resulted in an immediate and consistent reaction by both industry groups and companies engaged in E&P within U.S. shale gas plays. The main question that the article raised pertained to the expected life of shale gas wells which directly impacts the valuation of the gas reserves that can be economically extracted. Part of the extremely strong industry reaction centered on both the tone of the article which twice referenced Ponzi schemes - and some facts that were referenced. Since many publicly traded companies are involved in shale gas production, the implication of gas reserves being purposely misstated within SEC filings of financial statements is significant and if true would have severe legal consequences. Additionally, the industry directly questioned whether the reporting for the story objectively looked at all elements of production trends across multiple shale basins and evolving technology that should allow continued increases in shale well production yields.

5 Market Musings from SourceOne July Topic: Demand Response & Capacity Markets The advent of competitive energy markets across the U.S. created opportunities for innovative solutions to meet electricity supply and demand constraints. A major result of this development was the creation of Demand Response (DR) programs which serve as a method to equalize supply and demand on the power grid, especially during periods of peak-load. As discussed in the March Commodity Market Update, many Independent System Operators (ISOs) or Regional Transmission Organizations (RTOs) create a bid-stack of supply offers that is used to determine both the dispatch order of generating assets and the market clearing price. Traditionally, as demand increased generating assets were incrementally dispatched to serve the increasing load. With the introduction of DR products, demand response aggregators are able to meet increased load demand by combining the load of numerous individual companies, facilities, and/or electric account holders (DR customers) into blocks that they bid into the ISO/RTO bid-stack. When the market-price reaches the DR bid-price, instead of dispatching an additional generating asset to meet demand, the ISO/RTO dispatches the DR aggregator to reduce the overall load of their client pool. While there are many versions of demand response, numerous established programs require DR customers to shed their pre-determined load within 30 minutes of being dispatched. For providing reliable and predictable demand shedding, demand response participants are compensated in much the same way as a traditional generating asset. In addition to receiving a price for reducing load when dispatched, DR providers also bid their aggregated demand reduction capability into the forward capactiy markets, where applicable. By participating in the forward capacity markets, demand aggregators are compensated for making themselves available for dispatch. As a result, a typical demand response customer receives revenue based on both the load they are willing to curtail (measured in kw) as well as for the total energy curtailed during an event (measured in kwh). Central to the overall compensation for a DR participant is the amount of load that the customer can and is willing to curtail in 2. DR Compensation Components the case of a demand-response event. In most markets, the curtailable load is set through an audit event, which essentially replicates a normal DR dispatch event, but is used to establish a facility s ability to shed load. The customer s performance during these audit events will set DR performance targets for real DR dispatch events and is used to calculate compensation. The DR revenue associated with a facility s commited availability to shed load depends on the market price ($/kw) for electric capacity - either generation or curtailment. Figure 3 illustrates the capacity prices for locations in New England, New York and throughout the PJM zone (Pennsylvania, New Jersey, Maryland, Delaware, 3. Regional Forward Capacity Prices Virginia, West Virginia). It is important to note that the price for capacity is highly dependent on location. New York City and PJM s MAAC zone, both of which are highly constrained, often have higher capacity prices than other locations in New York and PJM. It is also worth noting that capacity prices have generally been declining in recent years. In ISO-NE, for example, the capacity auctions have settled at the pre-defined price floor at each instance, indicating that there is an oversupply of capacity in the form of generation and demand response, making the addition of new demand response participants potentially less lucrative than in the past. If you think your facility is a candidate for a demand response program, SourceOne s Commodity Team can work with you to find the right program and the best price for your operation. 1. Clearing the Day-Ahead Market Source: ISO-New England

6 Speak with SourceOne s Commodity Team SourceOne s industry analysts welcome your questions, concerns & inquiries. Please reach out to any of the following members of the SourceOne Commodity Team: Brant Davis, Vice-President of Commodity Management: bdavis@s1inc.com / Matthew Hooks, Senior Commodities Manager: mhooks@s1inc.com / Andrew Scott, Commodities Analyst: ascott@s1inc.com / Understanding the Charts Included in this Report: NYMEX Strip Pricing, : Strip prices are determined by averaging the prices for all of the NYMEX contracts for natural gas delivery at Henry Hub in the given year, as natural gas is traded as individual contracts with each having a unique delivery month. For 2011, the strip is an average of the remaining contracts still active. This chart shows the relative prices for natural gas for the coming four years, while also illustrating the historical pricing trends for those contracts. Prices are daily NYMEX close-of-day quotes provided by CME equotes. NOAA Weather Maps: The U.S. National Oceanic and Atmospheric Administration (NOAA) periodically releases climatic forecasts for up-to three months forward. As heating and cooling demand is a large driver of natural gas and electricity consumption, these medium- and long-term forecasts have significant affects on natural gas prices. Natural Gas Storage: The U.S. Energy Information Agency (EIA) releases weekly estimates of the amount of natural gas contained in underground storage facilities depleted gas fields, salt caverns, and aquifers. Weekly storage reports, especially as compared to historical data, offer an insight into real-time supply & demand dynamics that can significantly affect both short- and long-term prices. Peak storage quantity is equal to ~17% of annual U.S. demand. Energy Price Comparison: Daily prices for the three energy commodities are converted to an energy basis to allow for a price comparison on an energy equivalent basis. The conversion factors used are the following: crude: 7.42 MMBtu/bbl; heating oil: MMBtu/gal; coal: 17.6 MMBtu/ton. Market prices throughout provided by CME s E-quotes at 5pm on July 6, 2011 Disclaimer: Any forward-looking statements herein that are not attributable to third parties reflect SourceOne s current analysis and expectations, based on what management believes to be reasonable assumptions as of the date of publication. However, commodity markets are inherently volatile and unpredictable, and are subject to being affected by many factors, such as, among other things, weather, changes in economic and political climates around the world (including terrorism), and general economic and business conditions. SourceOne disclaims any obligation to revise or update any information, forecasts or opinions contained or cited in this report, regardless of changing circumstances, and is not liable for any action taken or not taken in reliance thereon. Please contact us for any of your energy related-needs: commodity@s1inc.com