As is customary, each December report we review the price movements for the past year and then offer some insight into possible price movements for the coming year. While most of 2018 could be characterized as non-volatile, it was bookended by volatility in January and November and December. The spot volatility in certain parts of the country last January was unprecedented, and the up and down movement in the front part of the natural gas curve during the last two months of the year was something not observed since the polar vortex in the winter of 2014. Electricity also exhibited some of the same volatility during the same time frame but to a slightly lesser degree. Despite all of this, the longer-term picture seems to indicate lower prices.
The monthly day-ahead average Henry Hub natural gas price averaged $3.16 per MMBtu for 2018, a 5.97% increase over the $2.982 per MMBtu average price observed in 2017. The Chicago City Gate average cash price of $3.02 per MMBtu was a 3.96% improvement over the 2017 price of $2.908 per MMBtu. Despite these cash market increases, with the exception of calendar 2019 prices, the rest of the further-dated calendar prices declined, and the market is noticeably backwardated (prices cheaper the further out on the price curve one goes). One slight change in 2018 was that forward prices in Chicago City Gate were a bit stronger on a relative basis to Henry Hub, a reverse from the prior two years. This could signal that all the pipeline additions providing easier access to the Chicago market have now been accounted for. The 2019 Henry Hub calendar price rose 8.52% to close at $3.056 per MMBtu, and the 2019 Chicago City Gate calendar price added on 12.54% to $2.93 per MMBtu. However, the Henry Hub 2020, 2021, and 2022 calendar prices declined 5.40%, 8.62%, and 8.28%, respectively, to conclude 2018 at $2.66, $2.60, and $2.65 per MMBtu. The Chicago City Gate 2020, 2021, and 2022 calendar prices declined 2.45%, 5.99%, and 5.86% respectively to $2.55, $2.49, and $2.54 per MMBtu.
The Midwest power markets followed a similar pattern with the PJM/ComEd Day-ahead average for 2018 coming in at $28.65 per MWh, a 6.27% increase over the 2017 average of $26.95 per MWh. In a rare example of spot prices actually being higher than implied forwards, the 2018 calendar forward price finished the 2017 calendar year at $26.66 per MWh, a premium of cash over forwards of 7.50%. This means there was a negative impact to taking an index price as opposed to locking in a forward price. The 2018 MISO/Ameren Day-ahead average was $30.37 per MWh, an 11.74% increase over the 2017 Day-ahead average price of $27.18 per MWh. Forward prices in 2018 were mixed in PJM/ComEd. The 2019 PJM/ComEd forward price increased during the year by 1.58% to $28.13 per MWh. The 2020, 2021, and 2022 forward calendar prices were all significantly lower as they declined 7.85%, 9.89%, and 11.56%, respectively, to finish at $25.64, $24.79, and $24.196 per MWh. The 2019 MISO/Ameren forward curve closed at $29.95 per MWh, an increase of 2.18%, and the 2020 MISO/Ameren forward calendar price added 3.90% to finish at $28.01 per MWh.
So, when reviewing these results, they easily should lead to the conclusion that we continue to be in a downward trending market for both electricity and natural gas here in the Midwest (there are some other area of the country that have exhibited much higher prices for reasons particular to those regions/hubs). However, it is not quite so simple depending on the commodity and structure that one is evaluating. For example, many natural gas customers have over the years adopted a strategy of taking an index price (in addition to an adder for the supplier) as opposed to receiving a fixed price to avoid paying a premium for the comfort of having a known price and eliminating upside risk. For 2018, the situation was reversed. Let’s take the example of an industrial gas user that uses approximately the same amount of gas each month. Entering 2018, a NYMEX Henry Hub fixed price for the entire year was at approximately $2.73 per MMBtu for the entire year. The actual index price for the year was $3.08 per MMBtu when adding up each of the individual monthly settlements that comprise the index price. So, a customer could have paid 12.82% less with no upside risk than a customer who assumes all the upside risk. When looking at the backwardation in both the natural gas and electricity markets in the Midwest, it is important to remember the above outcome. For example, in the PJM/ComEd market, the average day-ahead price for the years 2015 thru 2018 has been $27.55 per MWh. The lowest individual year was during 2016 when the average price was $26.47 per MWh. When making a procurement decision about PJM/ComEd for 2020, 2021, and 2022, a customer must realize that the forward prices reflect an existing 7.45% to 13.90% discount to the last four years of spot prices (the lowest four years on record since ComEd became part of PJM in 2006) depending on the term.
We understand there are many bearish price forces at work in both the natural gas and electricity markets. While we acknowledge the ease with which domestic horizonal fracturing companies can produce natural gas, we also believe that natural gas demand will continue to rise both domestically and globally and that the path of least resistance is higher for natural gas pricing. This is not even including the possible environmental event risks that could cause fracturing to be curtailed. Switching to power, there are certainly some elements that may indicate lower prices. To name a few: the continued proliferation of cheaper battery storage, the Illinois solar program that comes with significant subsidies to developers, and the existing subsidies to nuclear electricity generating companies are all factors that can lead to lower prices. That said, we think the current curves reflect these developments. We still believe that natural gas and electricity pricing is characterized by upside event risk. Among those risks are the aging of the aforementioned nuclear electricity generating facilities and possible budget pressures that would eliminate the subsidy funding for solar developers. Additionally, there is always the possibility of a surprise to the upside for natural gas prices. For these reasons we see the current forward curve setup for PJM/ComEd as attractive for customers who would like to lock in fixed prices for their future consumption obligations.
Sources: Reuters and CME GROUP
