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Electric, natural gas prices could stabilize; oil could spike

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Three words explain why your energy costs have increased lately: weather, politics, pipelines.

In discussing natural gas and electricity, weather, pipelines, and, to a much lesser extent, politics, came into play.

After finishing the summer natural-gas injection season of 2016 at a five-year high, natural gas producers showed restraint and limited production through summer 2017.

However, winter and summer weather the past two years has been relatively mild, which limited consumption of natural gas and electricity.

As a result, despite the lower natural gas production numbers for much of this year, natural gas in storage remained above the five-year average for most of 2017, thus keeping prices depressed.

The summer of 2017 did not feature a prolonged heat wave, although we saw three consecutive days of temperatures in the high 90s covering much of the eastern U.S. the week of July 17.

During this heat wave, the PJM Interconnection, Pennsylvania’s electrical grid, performed very well, proving that steps taken after the 2014 polar vortex – which saw prolonged extremely cold temperatures – worked well.

Prices did not spike during this period and, after this experience, we saw summer pricing for electricity on the New York Mercantile Exchange come down for 2018 and 2019.

DISAPPEARING DISCOUNTS

While local environmental groups have successfully delayed the PennEast Pipeline taking Marcellus shale gas through the Greater Lehigh Valley to New Jersey, the Rover Pipeline has already started transporting gas westward into Ohio, West Virginia, Michigan and Ontario.

As a result, the “negative basis,” or discounts to the Henry Hub gas pricing, that many customers saw in eastern Pennsylvania the past few years disappeared as Marcellus shale producers found a new market to distribute gas. Henry Hub is a trading and pipeline nexus in Louisiana.

This disappearance will lead to a higher wholesale price paid by many industrial customers in eastern Pennsylvania as their wholesale contracts expire.

For now, we should continue to see low electricity prices through the next year with a less aggressive Environmental Protection Agency and more efficient power plants coming online.

GLOBAL INSTABILITY

Moving to oil and petroleum, yes, August’s hurricanes had something to do with a late summer spike in gasoline price. But world politics had much more to do with the gasoline and diesel price increases inflicted on Pennsylvania since midsummer.

After a short-term spike in gasoline and liquid fuels prices because of the hurricanes, the refining and pipeline infrastructure recovered in a few weeks, temporarily bringing down prices.

However, just as pricing decreased, the effects of global instability – the politics – increased world oil prices. The global instability in southwest Asia and the Korean Peninsula and the collapse of economies in Libya and Venezuela helped to drive the world oil benchmark, North Sea Brent Crude, up by nearly 40 percent since July to more than $60 per barrel.

Other factors propping up oil prices are statements by members of the Organization of Petroleum Exporting Countries to extend production cuts at their meeting this week in Vienna.

UNCERTAINTY MEANS RISK

Then the news from Saudi Arabia about the corruption crackdown by Crown Prince Mohammad bin Salman and missile attacks from Yemen into Saudi Arabia led to uncertainty for this major oil player.

Uncertainty equals risk. Saudi risk always increases the price of crude oil.

The collapse of the socialist economy in Venezuela caused the state-owned oil company there, PDSVA, to default on billions of debt Nov. 14. Restructuring this debt with U.S. companies could be near impossible because of American economic sanctions in place.

That the Venezuelan vice president leading the negotiations, Tareck El Aissami, has been designated a narcotics trafficker makes negotiating with him a felony for U.S. entities. This mess in Venezuela already has removed 240,000 barrels per day from the world market and threatens to remove more than 400,000 barrels per day in 2018.

MORE RIGS

Now that U.S.-produced crude oil can be exported, the increase in the international Brent price pulled up the benchmark West Texas Intermediate price into the $50-$60 per barrel range.

Ironically, the loss of Venezuelan crude hurts U.S. Gulf Coast refiners by increasing the price of West Texas Crude and causing a regional shortage of crude in the Caribbean and Gulf of Mexico.

This regional shortage will undoubtedly lead to an increase in production from the Texas Permian Basin.

We may have seen this start as the Baker-Hughes rig index saw an uptick in new rigs reported on Nov. 10.

PETROLEUM: HIGHER PRICES

If we have a winter with sustained temperatures below normal, we could easily see natural gas in the first quarter of 2018 trade 20 percent higher. The National Weather Service January-through-March forecast indicates average to above average temperatures.

The prediction here is that there is more pain to be felt for petroleum as domestic crude production ramps up to offset losses from Venezuela and the Gulf states.

Wholesale electricity pricing will loosely follow natural gas, and only a sustained polar vortex to rival 2014 will cause a major pricing disruption in electricity.

Consult your energy professional if you want to understand your risk.

Jeff Hoover of Fogelsville is an energy analyst for Utility Rates Analysts of Camp Hill. A Certified Energy Procurement Professional and a member of the Association of Energy Engineers, he was energy manager for a multisite steel manufacturer. He has more than a decade of experience in energy and procurement and worked for nearly 20 years in the industrial gas industry. He can be reached at jeff@utilityratesanalysts.com.

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