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Q4 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.

Q4 OUTLOOK

A Tale of Two Energy Fundamentals

We enter the natural gas withdrawal season with the largest storage deficit in 22 years. Normally, this would be very alarming. However, winter temperatures are predicted to be above normal for most of the country. Low storage levels appear to be offset by mild temperatures. Thus, prices look stable, especially over the long term. Near-term, expect some price volatility if temperatures drop below normal. Read on for more details on prevailing energy trends.

Natural Gas Storage

Storage Deficit Continues to Grow

utility management solutions market outlook

The Energy Information Administration (EIA) “Natural Gas Storage Report” shows current storage levels are 15.3% below last year and 16.2% below the 5-year historic levels. We enter the withdrawal season (when supplies start to decline typically runs Nov 1 through March 31) at 600 Billion Cubic Feet below normal levels. Storage inventories, as compared to the 5-year averages, have not seen a deficit this large in 22 years.

Normally, we would expect the market to be panicking over such storage deficits and with the current gas inventory at 3,208 BCF. However, long-term prices remain steady under the $3.00/MMBtu threshold.

We will keep our eye on natural gas production. Natural gas prices and oil prices have an inverse relationship. Since both oil and natural gas are produced in the same region and use similar resources to produce them, the higher priced commodity will drive which one is produced more. The futures price of oil has increased again, stimulating oil production and lessening natural gas production. As natural gas production declines, so do storage levels and supply for summer power generation. As a result, gas prices could increase.

Normally, the market would be panicking over such storage deficits, with gas inventory at 3,208 BCF, but long-term prices remain steady.

Natural Gas Storage Levels (Bcf)
Current Storage Level 3,208
Storage - One Year Ago 3,788
5-Year Average Level 3,829

Weather Forecast

NOAA Predicts a Warm Winter

TEMPERATURE OUTLOOK

The NOAA weather service is predicting a high probability of above-average temperatures across the western half of the US, as well as in the Upper Midwest and northeastern states. The southeastern quarter of the Continental US is expected to experience normal winter temperatures. No region is predicted to feel below normal temps in between December and February.

Most predict that an El Niño system will develop in the coming months, which will result in overall warmer than normal winter conditions. The impact of mild winter temperatures will help soften the demands on natural gas prices and the effects of having low natural gas reserves.

Energy Prices

Near-Term Prices Are up, Long-Term Prices Are Flat

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 buoyed over the last quarter. Currently 12-month strip prices are at $2.975 per MMBtu, slightly below last reported at $3.00. In the near-term, spot market prices are surging due to the early November cold spell. Spot prices have reached $3.85/MMBtu, the highest since January 29th of this year. Long-term strip prices remain attractive. Calendar year 2019 is at $2.925, up 5.2% from last report and calendar year 2020 is $2.69, down 3.2% from last report.

Regional Outlook

Energy markets are complex, with many regional markets. 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

New England ISO Sees Reliability Issues

ISO-NE is facing the biggest winter reliability concerns in the nation. The ISO instituted a pay-for-performance capacity market, which incents power plants to be available more often. More generation availability should help alleviate some reliability issues and stabilize power prices in the region.

New York City Experiences Pipeline Transportation Constraints

Pipeline constraints into NY is not new. This winter prices are trending up 47¢/MMBtu over last winter. Experts believe the increase is mainly due to pipeline constraints.

MIDWEST

Midwest LMP Prices Spike as Temps Drop

An early November temperature plunge has caused near-term prices to spike. Gas and power prices are on the rise; up 1.5¢/kWH for electricity.

TEXAS

Texas Coal Power Plants Are Closing

Across the country 20 coal-fired power plants are to be shuttered in 2018. Texas’ four massive Vistra plants are among the plants closing. While ERCOT reports it will meet all reliability requirements in 2019, plant closings will impact generation, capacity, voltage quality and price. Electric prices are up 2¢/kWH this past week, but many factors are causing the price increase.

CALIFORNIA

California Has Pipeline and Storage Facility Issues

Southern California will continue its gas capacity issues. The Aliso Canyon storage facility continues to run below capacity due to an earlier leak. This region is also plagued with pipeline issues which will negatively impact gas and power prices.

2017-2019 Electric Prices by Region

Bottom Line

Long-Term Natural Gas Prices Remain Low

Natural Gas prices are a bit volatile in the very near-term. An early November cold snap pushed prices up. Buy, multi-year gas contracts remain low and below the $3.00/MMBtu threshold. Temperatures are predicted to be above normal for the winter months, even despite early our cold temps. Offsetting the mild temps, gas storage levels are precariously low, yet it hasn’t had the impact on prices as we normally would expect.

As most of you have begun planning your energy budgets for next year, look to lock in long-term contracts at low prices to ensure some budget certainty.

ASK YOURSELF THESE QUESTIONS:


What happens to our budget?

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

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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