The Kobiona Monitor

Volume 2 / Number 2
January 27, 2020

Kobiona’s leadership has enlisted the help of our Market Intelligence Desk to craft this monthly publication to share major market dynamics impacting future power and gas prices. As every client’s situation is unique, we encourage you to review market movements with us to decide whether any action on your part could serve to lower your future costs or avoid known, coming increases.

Market Overview  
It’s late January 2020 and we find ourselves in the sweetest part of the sweet spot – enjoying the market lows of 2016 and 2012 again with natural gas trading under $2/MMBTU and future power calendar strips hovering around $40/MWh ($.04/kWh).

We applaud those of you capitalizing on this incredible buying opportunity! In 2012 and 2016 the windows to do so were short;  in 2012 gas dipped under $2 for just one day, April 19th. In 2016 gas stayed under $2 for almost 6 weeks – then rallied and hasn’t come back since. By the end of 2016 gas was trading over $3.70.

Producers are making no money when gas is under $2, and we expect pricing uplift before Spring. We’ll get into the biggest threat to prices — as well as why your “all-in” price won’t mirror the rates of those years — but before that let’s walk through the bearish conditions in which we currently sit.

 

Prompt Month Prices
NYMEX prompt month (February) closed on Friday, January 24th at $1.926/MMBTU, down from $2.911 one year ago. This is the first time gas has dipped below $2/MMBTU since 2016.

NYMEX Prompt Five Year Lookback

Source: Nasdaq

Dry Natural Gas Storage
Driven by a warmer-than-average winter, for the first time since mid-2017, natural gas storage inventories have risen above the 5 year average. According to the EIA, the U.S. is sitting on natural gas inventories of 2,947 BCF. That’s 554 BCF (23.2%) above levels one year ago, and 251 BCF above the 5-year average of 2,696.

 

Near-Term Weather
Another bearish fundamental — The majority of the country will experience warm temperatures into early February, except for some pockets in the West, Northwest and Great Lakes.


 

 

The Biggest Threat to Pricing: Maturing Debt
Not to end on a bleak note, but historically low prices won’t linger at the bottom forever. And when the market corrects it tends to do so quickly. In our view the biggest threat to current low prices is the amount of debt maturing over the next few years by oil and gas producers. This is exactly what occurred in 2016 which caused prices to reverse — and it’s taken four years for them to come back to the bottom.

 

 

The Biggest Threat to Electricity Buyers: Missing the Market Bottom Hunting for a Lower “All-in”
Power itself in 2020 accounts for roughly half of an “all-in” rate. Capacity, ancillaries paid to ISO New England, and RPS (Renewable Portfolio Standard) costs account for the other half.

RPS costs screamed up in CT in 2019 as CT Class 1 RECs – the certificates load-serving entities (suppliers and utilities) must buy to comply with the state’s renewable standard, traded higher and higher. While these costs might tick down slightly, we view this as a permanent change in the cost deck and not something buyers can, or should, attempt to time. Those who delay electricity buying because future “all-in” rates are flat/higher than their current rate will miss this historically low market.

 

Questions?
For those tasked with procuring power and gas for the first time — or the tenth time — the industry can seem overwhelming with densely-technical and sometimes conflicting information. We welcome your questions on how to apply our observations, as well as your feedback on The Kobiona Monitor. Please share how we can make this publication more useful by calling us on 844-209-7972, or contacting us via email, info@kobiona.com.