April Energy Market Outlook Webinar Q&A – Part 1 of 2

Our April Energy Market Outlook Webinar, focused on several topics, including:

• Summer Outlook: Will a warm winter lead to a hotter-than-normal summer?
• Supply and Demand: Storage and production outlook for the remainder of 2017.
• Forward Prices versus Historical Index Averages: Forward prices are at an all-time low.
• Exelon Generation Portfolio Management
  • Guest Speaker Mike Dalla Valle, Exelon Generation Portfolio Manager, reviewed Exelon’s approach to portfolio management of its generation fleet and what customers can apply to their organizations.

  The webinar, which you can access by clicking here, inspired a few questions from some of our guests. We answer them below with input from principals in our Commodities Management Group.

  Q: Where is the revenue from liquefied natural gas (LNG) exports going to? What about new infrastructure?

  A: Only one terminal is currently in operation (Cheniere Energy’s Sabine Pass facility with Trains 1-2 operational and Train 3 in Q2 2017). The cost of the six LNG terminals that are currently under construction is high. For example, at Sabine Pass, the tab for trains 1-5 will cost $20 billion. At Cove Point in Maryland, which will be operational later this year, the (0.6 Bcf/day) facility will cost $3.8 billion dollars. Revenues from Sabine Pass could be used to fund trains 4 and 5, as well as Cheniere’s other project at Corpus Christi, Texas.

  Q: I thought Marcellus in New York was not producing anything for political reasons?

  A: Horizontal drilling/hydraulic fracking have been restricted by a moratorium placed in 2015 when the New York State’s Environmental Conservation Department released a formal study of the impacts of fracking on water, air and soil. This stated that drilling was “too inconsistent” to allow the practice. The study was supported by Governor Andrew Cuomo.

  Q: With natural gas storage high, how long do you expect the lower prices to continue?

  A: Underground storage finished last month at its third highest level in 10 years. However, storage is -15% below year-ago levels and an all-time record level was set in March 2016. The biggest support the market has received that has kept prices above $3/MMBtu as of April 25^th has been the decline in production year-over-year.  For the week ending April 19^th, according to the Energy Information Administration data via the Oil Price Information Service (IHS Markit company), dry production was estimated to average 69.9 Bcf/day. This is down -3% from 72.0 Bcf/day for the same week, one year ago. How production responds over the next couple of months, as well as the pace of storage injections and how they reduce or expand the year-over-year storage deficit, will be two key factors of gas prices ahead of this coming winter.

  Q: It seems like the past few years have all forecasted warmer-than-normal summers. Is “warmer than normal” 10 years ago becoming the new normal today?

  A: Yes, the 10-year normal is skewed to the warm side. The current 10-year normal for June – August temperatures is equivalent to the 9th hottest summer since 1950. The top four hottest summers have occurred since 2010.

  Q: Are there any indications of how active the hurricane season will be for 2017?

  A: With El Nino developing, wind shear across the Caribbean and the tropical Atlantic may increase.  At this point, we expect named storms to come in at or just below normal. On April 6^th, Colorado State University (houses a widely regarded forecast center started by the late Dr. William Gray) issued its forecast for the 2017 season. See summary table below.

  Q. In the hedging figures displayed, is gas risk included in the hedge percentage? If not what percentage hedged would you say the gas portfolio is three years out?

  A: The hedge percentage ranges provided represent the volume of expected generation that is hedged.

  Q. With higher expected gas demand (LNG, exports, etc.) and lower production, why are the NYMEX futures so low?

  A: To understand NYMEX’s range this winter from $2.79/MMBtu on Nov 2^nd, to a winter high of $3.99/MMBtu on Dec 28^th, to its current value of $3.05, we should first understand where supply and demand balances currently stand:

  

  As the table above shows, dry production is lower by -3% year-over-year, but exports to Mexico and LNG exports are higher overall. Pipeline exports to Mexico have averaged closer to 4 Bcf/day year-over-year, but scheduled pipeline maintenance has reduced flows to 2.9 Bcf/day.   Lower production and higher demand, especially with weather-driven demand in March (late winter cold snap), helped to manage storage to only 2,061 Bcf for March 31^st versus 2,400 Bcf a year ago.

  LNG export demand increased by an additional 1.2 Bcf/day in 2017. This will support demand. The question is how dry production outside of the Northeast (Pennsylvania and Ohio) will respond if prices move higher. If production comes online faster than expected, we could possibly see a pullback in prices. However, if production continues to lag and remains below 71-72 Bcf/day, that would be supportive of prices.

  Click here to read part 2 of our energy market outlook webinar Q&A! In the meantime, if you have questions, reach out to us!