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Q3 2018

The RealPage Energy Outlook

A quarterly publication providing detailed information on the forces that affect your energy rates.

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Contents

Get the details on pricing trends, weather, storage levels, tariffs and more.

ABOUT THE ENERGY OUTLOOK:

The Energy Outlook is designed to inform you about the current state of the natural gas and electric energy markets. While prices are most important, we offer insights into the drivers of the energy markets and shed some light on how these drivers impact market prices. The primary energy market drivers fall into 2 areas: Fundamentals and Politics.

  • Fundamentals are the factors influencing energy supply and demand of electricity and natural gas. Supply factors include power generation, natural gas production (drilling rigs, fracking, and horizontal boring), underground gas storage, and pipeline capacity. Demand factors include consumer usage and weather (driving how much energy is required for heating and air conditioning seasons).
  • Politics include changes to the legal and regulatory environment that can cause major moves in energy prices. Political impacts can be new emission standards such as mandated movement to cleaner generation facilities with higher operating costs, new energy taxes or fees, and restrictions on new pipeline or transmission line placement. Political factors can be domestic or international.

Q3 OUTLOOK

Natural Gas Prices have Softened Again – Storage Levels Concerning

Natural gas prices rose in June and retreated by the end of July. Weather-wise, temps are expected to be above normal throughout the country. Gas storage levels are low, nearly dropping below the 5-year average, and record export levels are diminishing the summer injections. Natural gas production is strong and holding off price advances for now. Long term pricing remains attractive, but with limited storage for this winter, the market may change. See below for more details on prevailing energy trends.

Natural Gas Storage

Storage Levels Significantly Below Last Year & 5-Year Average

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The Energy Information Administration (EIA) “Natural Gas Storage Report” shows storage is significantly below last year and is in jeopardy of dropping below the 5-year historic levels. The current storage level of 2,273 Bcf is 23.7% under last year’s same-day level, and 19.7% below the 5-year average level. Fortunately, the storage deficit has not impacted next winter’s prices which are still trading under $3.00 /MMBtu. EIA predicts this injection season will end with storage 9% below the 5-year average – the lowest levels since 2008.

Natural gas markets are dramatically changing, right before our eyes. Natural gas production is at an all-time high, consumption is flat, yet storage is decreasing. The U.S. is growing as a global natural gas exporter. More on this fundamental market change later in this quarter’s Outlook.

The current storage level of 2,273 Bcf is 23.7% under last year’s same-day level, and 19.7% below the 5-year average level.

Natural Gas Storage Levels (Bcf)
Current Storage Level 2,273
Storage - One Year Ago 2,978
5-Year Average Level 2,830

Weather Forecast

Most of the Country Will Experience Above Normal Temps in Q3

TEMPERATURE OUTLOOK

The NOAA weather service is predicting a high probability of above average temperatures across most of the continental U.S. with only Minnesota and parts of the Dakotas expected to be at normal temperatures. No region is predicted to feel below normal temps in the third quarter 2018.

The higher temperatures appear to be having an adverse effect on summer electric prices, as 12-month strip prices and spot market power prices in most regions have increased.

U.S. NATURAL GAS EXPORTS

In 2017, the U.S. produced 71.1 Bcf/day of natural gas representing 20% of the world’s production. The U.S. also became a net exporter of natural gas for the first time in 60 years and is currently the leading exporter in the world. 2018 exports are expected to reach 2 Bcf and increase to 5.5 Bcf in 2019. Canadian imports are predicted to remain flat.


Exports can be delivered via pipeline or Liquefied Natural Gas (LNG), which is transported via train. U.S. LNG exports totaled 1.7 Bcf/d in 2017, equating to 2.4% of domestic natural gas production. Mexico received nearly 22% of these exports, while the Asia Pacific region received 41%.

Pipeline exports amounted to 6.3 Bcf/d, or 8.9% of U.S. daily production. Mexico imports the most, receiving 64% of the total.

In June, two new NG pipelines exporting gas into Mexico were placed in service with total capacity of 1.17 Bcf/d, bringing July’s exports to 5.0 Bcf/d for the first time ever. Six additional pipelines are under construction.

What does this all mean? Domestic natural gas production targeted for storage now may be exported, thus diminishing critical winter supplies. As we all know, when supply decreases and demand stays the same or increases, prices usually go up.

Energy Prices

Power Prices are Up – Natural Gas has Softened

The Energy Outlook mainly focuses on natural gas prices because gas prices lead electricity prices. As natural gas prices increase or decrease, electricity prices often follow suit – but hours, days or weeks later. Also, natural gas has a national price established on the NYMEX. Other regional prices and markets exist, but are compared with the NYMEX prices. Electricity is different because the U.S. is divided into 6 regional markets, each setting its own price and having its unique market rules. All six regions tend to move in the same direction, but price volatility and generation vary considerably between regions.

Natural gas 12-month strip prices have softened from their near $3.00/MMBtu levels in June down to the $2.80 range. The dip in prices appears to be the result of record high natural gas production in July. Winter (Nov 2018 – Mar 2019) fixed prices are at $2.95, down 4% from last month. The $2.80, 12-month strip price is down over 6% from last month. Calendar year 2019, 2020, and 2021 are $2.78, 2.78, and $2.82 respectively.

Regional Outlook

Spikes in Texas. California Temps Are Rising.

Energy markets are complex, with many regional markets affecting the whole. The regional markets may differ from the overall continental energy outlook. Below are regional energy news of note and the factors driving market conditions.

NORTHEAST

North East power prices on the increase.

New York City saw electric prices increase .7 - .9¢/kWh in July due to peak summer demands. Mid-Atlantic power prices remain flat.

MIDWEST

Midwest LMP Prices remain backward dated.

Midwest electric prices are backward dated, meaning that 2021 and 2022 strip prices are trading at a discount to 2019 and 2020 making long-term purchases more attractive than near-term. Northern Illinois prices have dipped to new lows as Midwest gas prices soften. Southern Illinois, Ohio and Michigan are slightly above their all-time low strip prices.

TEXAS

Texas energy markets experience price spikes.

Texas’ ERCOT set an all-time peak power demand of 73.3 GW in July. Real-Time prices during the peak hour rose to $2.00/kWh. 12-month strip prices have begun to rise. Last year we were seeing fixed all-in pricing at the $0.04 per kWh range, however recently we often surpass the $0.05 per kWh mark. Expect power costs to mimic the weather, as temperatures increase, so will electricity prices. Texas power prices are up 16% to 21% year-to-date.

CALIFORNIA

California energy prices jumped up with the temperatures.

California has been hit with very high temperatures, thanks to the developing El Nino. In addition, forest fires and pipeline maintenance have reduced SoCal’s transmission capabilities which have driven up both gas and power prices. Spot prices are nearing $18/MMBtu in SoCal. NorCal and SoCal power prices are up 25% and 42% year-to-date respectively.

Bottom Line

Natural Gas Prices Spiked and Retreated – Take Advantage of Them!

Natural Gas prices have softened again back to May’s prices on the $2.70”s/MMBtu range, which is a good thing for consumers. This price drop is in spite of extreme hot temps this summer and the high power generation from natural gas resources that accompanied the high temps. Strong gas production has helped the price drop. But, with the high production, we have not seen the storage build up as expected. Storage levels are almost 20% below the 5-year history average. Strong gas stockpiles are crucial to meeting the winter gas heating demands.

Meeting the gas demands this winter may be a challenge if storage does not significantly increase the next few months. If the US continues to grow as a global exporter of natural gas, domestically we may feel the pain; possibly as early as this upcoming winter. Start planning ahead and look to lock in your gas supply and reduce the price risk associated with low storage levels.

ASK YOURSELF THESE QUESTIONS:


What happens to our budget?

What happens to our budget if natural gas prices spike this winter?

What is our risk management?

What is our risk management policy to protect the business against energy price volatility?

What is our risk tolerance?

Do we want budget certainty with fixed prices or do we want current market prices and the associated risk of cost fluctuations?

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