So this cold start to the winter means that the greatest influence on power and natural gas prices over the next quarter is going to come from the weather, the rate at which natural gas storage is drawn down and price of natural gas transportation.
The Weather
If you don't mind being wrong nearly all the time then long term weather forecasting might be the line of work for you. It is difficult to provide market direction when the determinant is so random. The 10 - 15 day outlooks provided by the Weather Channel (see website www.weather.com) as well as others at least provide some near term guidance.
Natural Gas Storage
The natural gas injection season ended on November 15th and since that date natural gas has been pulled from storage to meet the demands of heating customers and power generators. That in itself is as expected, it is the rate that natural gas is being pulled that will matter most. To date the withdrawals have been nearly double that of last year and the five year average as heating demand has been stronger than last year. Whether this weather dependent trend will continue (see my comments on long range weather predictions) is anyone's guess. The outlook for now for pressure to remain on forward prices as the quantity of gas required to replenish storage for the next heating season will increase natural gas demand through the summer.
Natural Gas Transportation
As mentioned at the top of this piece, the price of natural gas transportation has doubled since the Fall. Markets have memory so when warmer weather returns the expectation is that prices will not return to the levels we saw this past summer. In fact New England can not expect price relief until the interstate natural gas pipeline capacity is expanded. These expansions are planned to be operational by 2016. To observe the trend in the cost of natural gas transportation on the Algonquin Pipeline, see Graph B below.
Overall Outlook and Wildcards:
The outlook now is for power prices to rise to accommodate the true scarcity value of natural gas transportation. So price quotes in the $.07/KWh and $.08/KWh range are not likely to be revisited until after 2016. It more likely that the range of power prices will run between $.095 and $.105/KWh. Prices could certainly run up to $.11/KWh if the winter continues to drain natural gas storage and the interstate natural gas pipelines become even more constrained.
The road to the downside....warmer than normal weather! While warmer than normal weather may seem impossible as we are shoveling and bundling up, in the past it has not been unusual to have a colder than normal month followed by a warmer than normal month.
