What to Expect from Energy Markets in 2017: A Comprehensive Outlook
One of the most important pieces of advice we consistently give our customers is to go to market when opportunities emerge, not just when their contracts are about to expire. After all, you can never predict what the market will look like when that contract end date rolls around.
With experts like the US Energy Information Administration and the World Bank predicting higher electricity prices in 2017, the low-priced 2018 and 2019 futures contracts currently available in many parts of the US are exactly that—a market opportunity.
And so as the new year gets underway and the country ushers in a new federal administration, we’ve asked our team of experts to dive into the current energy markets and explain why companies with market exposure or expiring contracts need to pay attention.
Because natural gas currently generates more electricity in the US than any other fuel source, and because natural gas plays such a significant role in electricity prices, we’ve chosen to start this three-part series by focusing on four major trends in natural gas pricing:
- Weather forecasts and natural gas reserves
- Increasing natural gas pipeline exports
- Growing liquefied natural gas exports
- Domestic pipeline and infrastructure expansion
We’ll continue this discussion in subsequent articles, where we’ll address the impact that alternative energy sources and US energy policies will have on electricity and natural gas prices in 2017 and beyond.
1. Weather Highlights Hedging Opportunity
Energy buyers that value budget certainty and are adverse to market risk are currently seeing an ideal hedging opportunity. The US natural gas market is in backwardation, where contracts in 2019 are priced below contracts in 2018. As of January 18, we saw 2019 natural gas strips 11.3% lower than current strips and 4.4% lower than those for 2018.
Realignment of US Natural Gas Supply and Demand
Gas reserves remained near all-time highs throughout most of 2016, and the country saw historic lows in US electricity prices.
But beginning December 9, and continuing through the end of 2016, gas stock reserves fell back in line with—and eventually below—their five-year averages. The realignment of natural gas supply to US demand, along with changing weather predictions, led to significant variability in electricity prices.
In Massachusetts, for example, 12-month strip prices rallied 33% from November 9 through the end of 2016 alongside cold-weather forecasts ($33.36/MWh to $44.46/MWh). When weather forecasts turned milder in the New Year, MA Hub 12-month strip prices tumbled 13% to $38.74/MWh.
Weather Forecasts to Drive Short-Term Energy Prices
With the recalibration of US natural gas supply and demand, we expect weather to continue to play a leading role in determining short-term electricity prices across the US.
If temperatures remain mild, lower heating demand could check any recovery in natural gas prices. But because weather conditions can change on a dime, we encourage companies looking to lock in low-priced energy to capitalize on the current favorable outlook.
2. Pipeline Exports to Drive Texas Energy Prices
We expect a growing portion of domestic gas to be piped to Mexico in 2017, which will strain reserves in Texas and lead to higher energy prices in 2017.
Growing US Pipeline Exports to Mexico
The Mexican electricity and oil and gas sectors began the transition from state-run monopolies to competitive markets in 2016. Reducing oil-fired electricity generation (which accounts for more than 20% of Mexico’s electricity) by 90% relative to 2012 levels is a key goal in that market transformation. As the country transitions to a lower carbon-mix of generation, it will rely more heavily on US pipeline exports—which are expected to jump 95% over the next five years.
Pipeline Exports to Mexico Will Drive Texas Energy Prices
Four pipelines with a combined capacity of 3.5 Bcf/d are expected to be completed in 2017, further opening up the Mexican natural gas market to Texas supplies. Another two pipelines with a total capacity of 3.3 Bcf/d are expected to be completed in 2018.
Most of the pipeline exports to Mexico are expected to come from the Eagle Ford in southern Texas. In fact, we are already seeing pipeline exports buoying Texas gas prices. We expect this trend to continue as pipeline capacity continues to expand and regional demand grows.
3. Liquefied Natural Gas Exports to Have Stabilizing Effect on Domestic Prices
Many experts agree that increased liquefied natural gas (LNG) exports will eventually increase US demand and drive up natural gas prices, but we don’t see LNG exports having a broad impact on domestic gas prices in 2017.
Instead, we believe LNG will continue to show the stabilizing effect on domestic natural gas prices that it demonstrated in 2016.
Increasing LNG Production
Exports out of Cheniere Energy’s Sabine Pass liquefaction facility in Cameron Parish, Louisiana, will grow considerably in 2017, as Cheniere Energy doubles the facility’s number of operating liquefaction trains. Dominion Energy’s Cove Point facility in Cove Point, Maryland, is also on track to begin commercial operation during the second half of 2017.
Six additional LNG export projects are currently under construction: five in the Gulf Coast and one in Georgia. Another three projects have received FERC approval but are not yet under construction.
Streamlining LNG Exports
A streamlined supply chain will buttress US LNG exports in 2017. The Panama Canal can now accommodate more than 90% of the world’s LNG shipping fleet, compared to 6% before its June 2016 expansion. This expansion will save companies moving LNG from US export terminals to Asian markets $3.2 million per round trip versus the Suez Canal, and $2.8 million as compared to the trip around the Cape of Good Hope.
Why LNG Exports Won’t Broadly Impact Energy Prices in 2017
We expect increased LNG production and a streamlined supply chain to place upward pressure on natural gas prices in the out years, but we believe energy companies will increase production in proportion to LNG growth in 2017.
In an analysis of the macroeconomic impact of increasing US LNG exports for the US Department of Energy, Ken Medlock, senior director for the Center for Energy Studies at Rice University, acknowledged that increased LNG exports raise US prices in every examined scenario. Medlock predicts, however, that the impact from additional LNG exports won’t be felt until after 2025.
To this point, the US Energy Information Administration (EIA) confirmed that 12-20 Bcf/d of US LNG exports would increase domestic gas prices by 4-11%, per million Btu. However, the EIA only anticipates 1.4 Bcf/d of US LNG to be exported in 2017.
4. Domestic Pipeline Infrastructure Projects Showing Flattening Effect on Outward Pricing
With natural gas reserves receding from their record highs, pipeline exports to Mexico increasing, and LNG exports growing, there are many trends signaling higher US natural gas and electricity prices.
It is important to note, however, that energy companies curbed production in 2016. According to the EIA, US natural gas production fell 5% from November 2015 through Nov 2016—marking the first year-over-year decrease in production in more than a decade.
As new pipeline capacity is built in and around the Marcellus and Utica shales, we expect energy companies to increase production in 2017. Expected development of pipeline capacity in the New England, Mid-Atlantic, and the Midwest regions is currently damping pricing for 2018 and 2019 futures.
Declining Natural Gas Production in 2016
We can attribute much of the decline in US natural gas production to two major influences: negative basis pricing around the Marcellus and Utica shales, and the lack of pipeline infrastructure connecting these shale regions to higher-priced markets in the Midwest, New England, and Canada.
The Trump administration seems poised to remove hurdles to pipeline and other infrastructure projects, however. We expect FERC and the new federal administration to issue several regulatory changes in 2017 that will alleviate the glut in and around the Marcellus and Utica shales, easing discounted basis pricing and driving new production.
Negative Basis Pricing Keeping Gas in the Ground Around Marcellus and Utica Shales
When regional prices trade below Henry Hub and companies are physically unable to reach higher-priced markets, energy companies lack the incentive to increase natural gas production.
Basis contracts in the regions surrounding the Marcellus and Utica shale plays (sprawling from New York to Pennsylvania, West Virginia, Ohio, Maryland, Virginia, Kentucky, and Tennessee) entered 2017 trading at a discount. As of January 17, the 12-month basis strip for Dominion, TETCO-M3, and Columbia Gas Appalachia were all negative.
Lack of Pipeline Infrastructure Preventing Production
As seen above, basis contracts at Algonquin Citygate were positive as of January 17. The lack of pipeline infrastructure connecting the Marcellus and Utica shale regions to the higher-priced New England market, however, stymied new production.
FERC to Streamline Infrastructure Projects in 2017
We expect FERC to address these issues in 2017. According to Bentek Energy, 14,330 MMcf/d of pipeline capacity is currently delayed due to regulatory restrictions.
Impact on 2017 and Futures Markets
While we do expect FERC and the Trump administration to remove red tape stalling northeast pipeline projects, we don’t expect many new projects to be in service in the first half of 2017. Strip pricing will climb in 2017 as international exports increase and the economy grows, but expectations of additional pipeline capacity toward the end of 2017 are preserving the 2018 and 2019 hedging opportunities currently found in many markets.
What This All Means for Your Business
As energy prices have trended near historic lows for the past couple years, it has been relatively easy for companies to hit their energy budgets without proactively managing costs. We expect that trend to reverse in 2017.
If your contract is up this year, or if any part of your bill is indexed, it will be important to track market changes and hedge against rising prices. Enel X’s team of energy market experts—who average of 18 years of market experience—is here to help you make sense of the market and identify opportunities to keep your energy budget and expenses in line.
If you’d like to sit down with one of our market experts to get a better sense of how these trends may impact your specific business, contact us today.
And stay tuned for the next installment of our market outlook series, in which we’ll visit the impact that alternative sources will have on energy markets in 2017.