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Energy Market Update: August 9, 2018

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Chicago Natural Gas and Power Markets

Today, we’re talking about Chicago. The natural gas and electricity markets have been responding to low natural gas storage levels for some time.

Tune in to the video below.


Basis Price

Reminder: The basis price is the differential between the Chicago and Henry Hub prices.

Overall, prices have been low on average. April of this year saw a particularly sharp drop in the forecasted prices for 2019 and 2020, as the Rover gas pipeline began to transport gas into Chicago from Western Pennsylvania. April’s basis prices were, in fact, the lowest we have yet seen for this region on an Energy Market Update.

July and August, by contrast, have ushered in a price spike for all three indexes. The reason is simple: demand. Demand for natural gas is at a record-breaking high currently, due both to the unusually hot summer we’ve seen across the country as well as the declining efficiency of our natural gas power plants, which now have to run more often.

Additionally, we are exporting more LNG (Liquified Natural Gas) than ever before. Natural gas is therefore being used in three major ways:

  • Burner Tip

  • LNG (for export)

  • Storage

These three uses of gas compete with one another and drive up demand. The result thus far has been that natural gas storage levels are quite low compared to the five-year average, which is part of the reason for the market’s bullish behavior over the last couple of months.

Fixed Price

Reminder: The fixed price is the basis price plus the NYMEX average price for natural gas futures.

2019 fixed price forecasts have risen along with basis prices, for the same reasons outlined above. However, 2020 and 2021, forecasts have stayed somewhat flat, thanks to relatively stable (and in some cases decreasing) index prices.

One important note: 2.40 is the price to watch. Why? This price has, in recent years, served as the “break-even” benchmark for natural gas producers. Prices at or below 2.40 don’t look particularly attractive to natural gas producers, who may choose to slow down production growth if prices remain stagnant.

PJM COMED On-peak electricity prices

Electricity price forecasts beyond next year are approaching an all-time-low, thanks to historically low natural gas prices. The forecasted price is very low for 2020, but even lower for 2021. What does this mean? Now might be a good time to explore the possibility of locking in a fixed price with our team of energy advisors.

Off-peak prices, however, could be subject to the influence of the price of coal, which has gradually been gaining ground.

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Posted: August 09, 2018