After very choppy trading yesterday, Natural Gas futures continued the downward trend from the previous 4 trading sessions. Yesterday’s build bucked the trend of underperforming injections, as the 67Bcf was slightly higher than the 5-year average 65Bcf. Next week’s report has the potential of showing an even higher injection due to the mild temperatures during this week.
Regarding weather, the 1-10 day forecasts are calling for below normal temperatures across the eastern half of the continental US; however, after the 10th day milder temperatures are expected.
In terms of demand for natural gas, Hurricane Sandy is expected to hit the Mid-Atlantic coast on Tuesday around 2am. The American and European models suggest that Sandy could touch between the Delmarva peninsula and NY. Sandy has now been labeled Frankenstorm (see picture below), since it is likely that it will collide with a cold low pressure. We are expecting:
- Widespread tropical storm force winds
- Heavy wet snow
- Major damage to coastal properties
- Many downed trees
- Flooding
- Power outages, which could last days or a couple of weeks
I highlighted the last bullet since the storm has the potential to reduce demand for natural gas, and might offset the effect of the cold temperatures.
On the nuclear front, outages remain strong, and as of yesterday they totaled ~27,000MW (19% higher than the 5-year average). This fundamental driver could limit further downside next week.
Regarding ERCOT, yesterday the regulatory commission voted on system wide offer caps. Based on previous comments from one of the commissioners, it appeared that the PUCT was going to take more time to evaluate all available options to come up with a long term solution for Resource Adequacy. Nevertheless, they approved an increase to the caps as follows:
The PUCT commissioners voted 3-0 to raise LMP caps to:
$5,000/MWh in June 2013
$7,000/MWh in June 2014
$9,000/MWh in June 2015
Today, there was a strong move up movement on heat rates from 2013-2015, though isolated to the summer only. The increase so far has been between 100-200 ticks.
