Natural Gas & Electricity Prices - December 2, 2008
Natural Gas
One of the challenges in trying to predict where future energy prices are going is that the energy market continually changes and evolves. Here are a few examples:
· Three or four years ago, weather in Europe and supply in Asia was irrelevant for North American natural gas buyers. This began to change in 2006 and 2007. These areas came into focus as lower North American production resulted in North America requiring LNG deliveries. In 2008, increased North American production has reduced the need for these same LNG imports.
· Interruptible customers typically did not have to worry about the utilities curtailing their supply until very cold weather arrives, usually in January. This year, one of the utilities has discussed the possibility of curtailments in the CDA delivery area this week.
· Ontario Power plants (natural gas-fired power facilities) that have recently been built will soon start to have a large impact on natural gas supply and transportation. These facilities use gas on an as needed basis, and the daily amounts they use are enormous. The changing Ontario power marketplace will have a major influence for Ontario natural gas users.
The Energy Information Administration (EIA) report for the period ending November 21, 2008 shows total U.S natural gas storage at 3.422 Tcf. Last year at this time we had 3.531 Tcf, and the 5-year average is 3.334 Tcf. This week’s EIA storage report is expected to be a 70 Bcf inventory draw, compared to the 66 Bcf draw last week, a 66 Bcf draw last year at this time and a 5-year average draw of 45 Bcf. Overall, natural gas inventories are above average.
Another very dynamic effect, is crude oil pricing. Currently the Nymex crude oil prompt month is priced at $47.50 U.S. per barrel, representing a 7.5 to 1 ratio of crude oil to natural gas prices. As you will recall from earlier newsletters, this is the ‘normal’ ratio that we would expect. However this is somewhat misleading, as crude oil and natural gas prices, which were VERY correlated a few years ago, have de-coupled to a large degree and right now the link is more coincidence than anything else. We do expect the relationship between oil and gas to strengthen in the next few years.
Lastly, the impact of the weak economy is now having a dramatic impact on natural gas demand. Industrial demand in the U.S. had been strong until the end of May, but more recently industrial demand has dropped when compared to previous years. The latest data available from the U.S. government shows June to August industrial demand is very similar to levels in 2007. September demand was down 8% from the last year. This is part of the reason storage stocks have increased recently.
Please contact your Client Services Representative for more information on your account. Please contact Dave Duggan for any questions regarding the information in this report.
Ontario Electricity
Average ON PEAK Price for Nov: 6.0 cents / kWh
ON PEAK Hours over 7.0 cents: 27% in Nov.
32 % year to date
Highest price in the past week: 13.4 cents / kWh on Nov 30th
We wrote a few weeks ago about declining demand in Ontario. The IESO recently issued their October 2008 market update and noted that the total Ontario demand for that month was 11.6 terawatt hours, which is the lowest October demand since the market opened in May 2002. Also, the peak demand in October was 19,366 MW, which was the second lowest October peak since market open.
The province’s goal of phasing out coal requires that new generation be built to take the place of the 6,400 MW of coal-fired generation in the province. Some coal plants are testing biomass (wood or agricultural waste) as a fuel instead of coal. But the majority of the replacement generation will be natural gas-fired plants.
Recently, the largest of these plants, Greenfield Energy Centre, entered into service in southwestern Ontario, near Sarnia. It consists of 4 generating units, 3 at 212 MW each and one at 517 MW. These stations require a great deal of gas when they are operating (in the range of 100,000 GJ of gas per day and more), so they will likely exert an influence on price and availability of gas in Ontario, especially as more are built.
The price of the power produced is also an issue to be watched closely. Coal is a relatively cheap fuel, so the power it produces is priced fairly low as well. Natural gas is a higher-price fuel and also more variable in price. The price of power in Ontario will reflect this difference as more coal is phased out.