Eisenbach Consulting Market Update – February 2, 2012
Eisenbach Consulting closely monitors market trends and makes projections using market data, such as historical gas prices and storage reports, regulatory changes, pending legislation and other market influences. Our research and analysis is intended to be used to assist decision makers with regard to energy procurement purchasing electricity in Texas and other markets.
Recent changes in the market have led us to change our long standing view favoring shorter-term fixed-rate energy agreements, in favor now of longer-term fixed-rates. Although the market is bearish short-term, we feel that the very small premium between a 12 month term and a 60 month term is justified by the risk of price increases going forward. We believe the upside to be in the 3-cent/kWh range. Upward movement in short-term pricing will largely be based on weather (if it gets cold suddenly, prices will go up). So, a strategy to pay 1/2–cent/kWh more long-term to avoid a potential 3 cents/kWh of upside risk both short and long term seems prudent. Conversely, the downside opportunity in the current bearish market is ½-1 cent/kWh at best. That is, we feel prices are near the floor and could fall no more than 1 cent, in a best case scenario.
The chart below will help you visualize how significantly the price of natural gas generated electricity for a 5-year term has fallen in the last 12 months.
Summary – Electricity prices are currently very low, upside-risk is medium, downside opportunity is very low. The conclusion to be drawn is that it is advantageous to now lock-in energy prices for a long term (four to five years). Price certainty through 2016 is currently available at a very slight premium to short-term prices.
Factors
- Prices near record lows for calendar year 2012 – 2016
- EPA and other regulatory factors loom and could change prices significantly as regulatory pressures on the market mount. The EPA has delayed it’s cross-states air pollution rule, which has helped prices come down, but as soon as an announcement is made about when this rule will be implemented, prices could rebound.
- Winter weather – to this point forecasts continue to predict a mild winter. Colder winters cut into reserves driving prices up.
- As of December 23, domestic inventories are at 3,848 Bcf, which is 9.1% above the same time a year ago and 13.7% above the 5-year average. It’s hard to imagine it getting much better (limited downside opportunity).
- Wednesday, January 19, 2012, natural gas closed at a 10 year low settle price of $2.32.
