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EnergyWindow MarketElert TM - June 2005
www.energywindow.com
June Elerts
California -
Re-regulation is rearing its head in CA, with a move on the part of two groups, The Utility Reform Network (TURN) and the Alliance for a Better California, to place a referendum on the ballot in a special election called by Gov. Schwarzenegger to revert to a regulated utility environment.
New York -
It's a hot time in the old town, with Con Edison reporting it set a new record peak demand for June of 12,138 MWs on the 14th. This is the second highest system peak demand recorded for any month. The highest was 12,207 MW set on August 9, 2001.
Texas -
TXU and TNMP electric fuel cost factors are on the rise again. This time there is an upward adjustment of 21% across the board for TXU and 5% for TNMP.
Nice Time for a Dip?
There has been much talk about the impact of crude oil and burgeoning economies in India, China and elsewhere around the globe on wholesale prices lately, but this month's Short Term Outlook from the EIA (http://www.eia.doe.gov/emeu/steo/pub/contents.html) paints an interesting and comprehensible picture about some things closer to home that can be expected to influence energy prices in the next couple of years. EIA also presents some insight into what might create an opportunity for lower prices later this year. To summarize some of the important issues detailed in the EIA report:
- Natural gas inventories, though high now, are expected to plunge by the winter
- Demand for natural gas is expected to rise 4.3% above 2004 levels by the end of 2006
- Demand for electricity is expected to rise 4.4% above 2004 levels by the end of 2006 (after a 1.4% increase in 2004)
- Electricity demand is anticipated to be significantly higher than the average for the third and fourth quarters in 2005
- Natural gas production is seen as being flat for 2005, despite increases in rig count
Energy prices (historical or projected) are not linear, but vary considerably over time. Expectations on the part of the futures markets for the conditions described above are already written into current forward prices. A change in expectations will change those prices. The chart below shows the number of times a given month has yielded the lowest or highest monthly settle price for the Henry Hub commodity during each of the past 14 years. It reveals that the months of April, May and June have never yielded the annual low or high price, making these the least volatile in terms of a monthly price. The months of February, March, August, September and October yield the greatest number of annual lows, despite the fact that four of these months fall in winter or summer seasons. The evidence would seem to indicate that as winter or summer weather actually occurred, previous high prices that reflected anticipated extreme weather (or reduced supply) were compromised by either milder weather or enhanced production.
A study of the monthly settle price for Henry Hub (HH) natural gas settle prices reveals that August, September and October yield the greatest number of annual lows. Figure 14 looks at the 14-year history of the HH settle prices and clearly shows that September yielded the lowest settle prices over that period. The same is true for the past 10, 5 or 2 years. Of course, this is just looking at month by month prices, and these are influenced by seasonal conditions. Yet, when we look at the NYMEX HH 12-month futures strips over the past two years laid into the graph (purple area at bottom), we see that the forward trends generally coincide with the settle prices, and that the best month to buy 12 months forward during that period was also September.
The bottom line? Be on the watch for an energy (gas or electricity) buying opportunity in the third quarter. If natural gas spot prices dip below EIA's third quarter estimate of $6.60/MMBTU or the NYMEX HH 12-month futures strip gets below $7.00 again it may just signal a September (or August or October) to remember. Read more on this topic by going to expanded article.
Quick Buyers' Tip
Determining the right time to buy energy requires discipline and foresight. Calculating projections based on history and trends is a good start, but in many markets where the utility benchmark is currently more desirable, or where you have taken an indexed price as a method of "waiting out" the market, you need to set a benchmark (or "strike price") at which you think the markets will become desirable and present an acceptable deal. You must then monitor those markets for the right movement, and be willing to change your expectations (and the benchmark) based on real-world evidence.
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