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Propane and Natural Gas – Birds of a Feather Not Flying Together

Propane is a versatile source of energy common in rural areas that are “beyond the main” of utility natural gas service.  It is often used for home space and water heating and cooking, as well as for agricultural uses such as crop drying, irrigation pump fueling, space heating in green houses, pig and poultry brooding, frost protection, standby electricity generation, and even food refrigeration.

Where does propane come from?

Propane is produced in association with natural gas (along with other natural gas liquids, or NGLs) and is also a byproduct of crude oil refining.  Because propane is a gas at atmospheric pressure, it is compressed into a liquid state under moderate pressure for storage and delivery.

The shale gas revolution has led to dramatic increases in natural gas production.

As previously reported, US natural gas prices have remained low for some time.  This is despite the existence of many influences that more recently would have driven natural gas prices upward (see Natural Gas Market Update, June 2018).

Because propane is produced in association with natural gas, along with the dramatic increase in US natural gas production has come a dramatic increase in US propane production.  As natural gas production has increased, so has NGL production.

With such an increase in propane supply, propane prices, like natural gas prices, are low – right?

No.

While natural gas prices have remained low (red line below), propane prices have risen significantly (blue line below).

    

Why?

Exports of propane from the US have grown and continue to grow.

Conclusion

Rural residential and agricultural customers who rely on propane rather than natural gas are not benefiting from the shale gas revolution to the extent that others are in the US.  Increasing propane exports are a major driver of this phenomenon.  This is another illustration of the complicated dynamics underlying energy commodity markets and an example of how those markets can change over time, often in unexpected ways.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

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Copyright 2018 by Avalon Energy® Services LLC

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Natural Gas Market Update, June 2018

Natural gas prices remain low and below their declining 21-year trend.  See graph below.

The prices presented here are for delivery at the Henry Hub in Southern Louisiana.  Natural gas prices in other producing areas of the US, such as Northeastern Pennsylvania, the Permian Basin, and the Williston Basin, are significantly lower.  The prices here are also in nominal dollars.  If plotted in real dollars, the downward trend would be even more pronounced (see These are Days to Remember).

Despite the current low price environment, there are a number of factors putting upward pressure on natural gas prices, including:

  • Increasing liquified natural gas (LNG) exports
    • Cheniere Sabine Pass trains 1-4 online
    • Cove Point terminal on the Chesapeake Bay ramping up
    • 11 additional liquification trains along the Gulf Coast in the works to come online in the next five years
  • Increasing pipeline exports to Mexico
    • Up more than 300% since the Great Recession
  • Increased industrial demand
    • Particularly in the petrochemical industry
  • Increased demand for natural gas-fired electricity generation
    • As coal plants retire
  • Natural gas storage levels down
    • Currently 25% below five-year average at this time of year

Given these influences, how do natural gas prices look in the futures market?  Low and continuing their decline.  See the graph below.

After peaking at $3.16/mmBtu during the winter of 2018/2019, natural gas prices remain below $3/mmBtu for the remainder of the 60-month forward period.

What is driving this?

Supply.  More specifically, dramatically increasing supply.

Natural gas production is up 7 Bcf/day from this time last year to 79 Bcf/day.  The US Energy Information Administration (EIA) projects US natural gas production will reach 83 Bcf/day by December 2018.

To see how much things have changed, read these older natural gas market updates:

Natural Gas Market Update October 2014

Natural Gas Market Update November 2013

Natural Gas Prices – Time to Hit the Panic Button?

Natural Gas Price – Looking Ahead January 2012

Natural Gas Price Drivers (January 2012)

As a result, natural gas (and electricity prices) are currently attractive—making this a good time to consider locking in your supply needs.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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Natural Gas and Electricity Are Parting Ways – Part 2

In our last article, Natural Gas and Electricity Are Parting Ways – Part 1, we explored the weakening correlation between wholesale natural gas prices and electricity prices in the Mid-Atlantic.  While natural gas prices have fallen dramatically over the past seven years, and electricity prices have fallen as well, electricity prices have not fallen as far.  We discussed how this weakening relationship is, in part, a result of natural gas-fired generating units more and more often being dispatched before coal-fired units.  In this article, we look at the influence of capacity prices.

Capacity

The cost of energy delivered by a competitive supplier consists of several elements—generation, capacity, transmission, and ancillary services.  Costs to suppliers resulting from PJM’s energy auctions are reflected in competitive suppliers’ generation charges.  Competitive suppliers are also required to own or to reserve generation capacity.  PJM runs separate capacity auctions to place a price on this capacity.  These auctions establish capacity prices for each of the three consecutive future planning years.

Polar Vortex 

During the depths of the Polar Vortex of January 2014 (see What Does Volatility Look Like?), there were times when more than 20% of generation capacity in PJM was unable to respond when dispatched by the grid operator.  The grid operator then had to call upon non-economic (meaning more costly) resources to fill in, some of which also were unable to respond.  The grid came within a few thousand megawatts of brownouts, and prices soared to more than $2,600 per megawatt hour during some hours.

Capacity Performance

Clearly more reliable generation capacity was required.  PJM proposed, and the Federal Energy Regulatory Commission (FERC) approved, a change in regulation creating a new Capacity Performance product.  With Capacity Performance, PJM established new, more stringent requirements for generation regardless of weather conditions and system conditions, and also established onerous penalties in the event that generation does not respond when called.  Most generators bid their capacity again during two Transitional Auctions, for the planning years 2016/2017 and 2017/2018. As a result, due to this change in regulation, capacity prices have been reset higher for each of these two planning year periods.

The table above presents, for the 2016/2017 and 2017/2018 planning years, capacity prices that were originally established as part of Base Residual Auctions (BRA) and the new prices established as part of Capacity Performance (CP) Transition Auctions.

Additional investment was clearly needed in order to improve system reliability.  PJM’s strategy with Capacity Performance is, on the one hand, to provide generators “resources to invest in improvements in such areas as dual-fuel capability, securing firmer natural gas supplies and upgrading plant equipment,” while, on the other hand, imposing substantial penalties for non-performance.

These increased costs associated with Capacity Performance, which will be reflected in electricity prices, are unassociated with changes in natural gas prices and are another driver of the decline in correlation between electricity prices and natural gas prices.

Notes:

– Evelyn Teel contributed to this article

– Capacity prices and quote from PJM website

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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Natural Gas and Electricity Are Parting Ways – Part 1

In recent articles, we have explored the dramatic decline in natural gas prices over the past seven years.  See These Are Days To Remember and 10,000 Maniacs Were Right.

In the US Mid-Atlantic, natural gas and electricity prices have, over time, tended to move together.  While there has by no means been a perfect correlation between the two, the relationship has been strong.

Over the past 15 years, the coefficient of determination (R2) has averaged about 67% (see yellow line).  In other words, over this time period, 2/3 of the change in electricity prices can be explained by changes in natural gas prices.  More recently, however, the strength of this relationship has weakened and continues to weaken further (see red line).  Electricity prices have declined but not as precipitously as those of natural gas.

Why has this relationship weakened?  Two significant drivers relate to (i) dispatch order and (ii) capacity prices.

Dispatch Order

In scheduling energy to serve electricity users, the grid operator, PJM, utilizes a least-cost dispatch model.  PJM develops an expectation of projected system load on an hourly basis and then seeks bids from generators to supply energy to serve this load.  After bids have been submitted, for each hour, PJM accepts the lowest cost offers first and then works their way through higher price offers until sufficient supply has been cleared to match the projected load.  (There are a number of system constraints and complications that must be incorporated into the process, but this pretty much captures it.)  For each hour, the price at which the last megawatt-hour (MWh) clears sets the price for all the supply offers that clear in that hour.

For many years, the last generating units cleared were generally natural gas-fired units.  As a result, it has been these natural gas units that have set the price for electricity, leading to the strong link between natural gas prices and electricity prices.  A common understanding was that “as natural gas prices go, so go electricity prices.”

But now, low natural gas prices are leading to lower and lower supply bids by natural gas-fired generators, causing them to more frequently fall down the dispatch order and clear before coal-fired units.  Because of this, coal fired units are now more often becoming the marginal, or price-setting, units.  And, as a result, falling natural gas prices have not driven down electricity prices to the extent they once would have.

In addition to procuring energy, electricity wholesale suppliers must also own or procure capacity.  In our next article, we will look at how capacity costs influence electricity prices.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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10,000 Maniacs Were Right

The dramatic decline of natural gas prices was the focus of our last article (These Are Days to Remember).  As we noted then, in real dollars, natural gas prices were near all-time lows.  Since then, natural gas prices have continued to fall.

Yesterday the November futures contract settled at $2.033 per mmBtu.  The last time the November contract was this low was 17 years ago in 1998, when it closed at $1.97 per mmBtu.

The “winter strip” is the simple average of natural gas futures prices for the five month period of November, December, January, February, and March.  These five months represent the winter heating season, when demand for natural gas is historically the greatest and natural gas prices, correspondingly, are generally highest.

With the rolling off of the November contract yesterday, the 2015/2016 winter strip closed out at $2.349 per mmBtu.

The graph below puts this into perspective by comparing the current winter strip (in red) to that of previous winters.

Incredible.  These are days to remember.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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These Are Days To Remember

Natural gas prices are really, really low in the wholesale market.

The graph above shows daily natural gas prices traded at the Henry Hub, in dollars per million British thermal units ($/mmBtu), from January 1997 to today.  Prices on the graph are in nominal dollars, not adjusted for inflation.  Natural gas prices have exhibited a great deal of volatility.  The average price over this period is $4.60 per mmBtu and the long-term trend is upward sloping as shown by the red line.  This fits well with the widespread perception that energy prices always go up.

This graph shows prices on a monthly basis, which smooths out some of the volatility, but not much.  Prices on this graph are in real dollars.  Specifically, they have been converted to today’s (2015) dollars.  After adjusting for inflation, the monthly average price is $5.53 per mmBtu and the long term trend is downward sloping.  In other words, in real dollars, natural gas prices have declined over this period of time.

Why have prices declined?  In a few words—the shale gas revolution.

Until 2008, the contribution of shale gas production to total US natural gas production was small (see green area above).  Since then, total natural gas production has risen dramatically.  Even more dramatic is shale gas’ contribution to total US natural gas production which today is greater than 56%.  The Energy Information Administration’s 2012 “Outlook” projected this level of contribution on the part of shale gas would not happen until 2035.  Twenty years sooner than predicted, here we are.

Using December 2008 as a demarcation point and splitting the data into two segments, we see two very different worlds.  From January 1997 to December 2008, natural gas prices rose by more than 19% per year.  Since then, they have fallen 5.7% per year.

Other commodities are experiencing declining prices recently.  Iron ore and copper prices, for example, have dropped dramatically, primarily because of declining demand in China.  Natural gas prices have declined in the face of rising demand.  This is truly astounding.

This frequency diagram shows how today’s prices compare to historical prices (all in real dollars). Natural gas prices are really, really low.

But, there is more to this story.  First some background.

During World War II, two pipelines (the Big Inch and the Little Inch) were built by the US government to transport crude oil from the Gulf Coast to refineries in New Jersey. The pipelines allowed the oil to be transported by land, rather than by sea tankers (which were exposed to German U-boats) as had been the practice.  After the war, these pipelines were sold to commercial enterprises and transformed to transport abundant and low cost Gulf Coast natural gas to Northeast industrial markets.  Subsequently, other pipelines were built to move low cost natural gas from the Southwest to the pricier Northeast and Midwest markets.

The difference between the prices of a commodity at two different delivery points is known as basis.  If Gulf Coast natural gas at the Henry Hub sells for $5.53 per mmBtu and sells for $6.53 in New Jersey, the basis differential is $1.00.  And this is the way it was for many decades—natural gas in Northeastern markets trading at a basis (compared to the Henry Hub price) of a dollar or more.  But things have changed.

Because of the immense increase in volume of natural gas being produced from the Marcellus Shale, natural gas for delivery in Pennsylvania and New York State, for example, sells for $1.50 or more below the Henry Hub price. This is a negative basis.  Today, with natural gas trading around $2.60 per mmBtu at the Henry Hub, natural gas can be purchased for a little over a dollar per mmBtu in Pennsylvania and New York.

For energy buyers, these are days to remember.  For natural gas producers, not so much.

Evelyn Teel contributed to this article.

 

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

See these related articles:

Real Electricity Prices (Energy Prices Always Go Up, (Part 5)

Energy Price Always Go Up (Part 4)

Energy Prices Always Go Up (continued)

Energy Prices Always Go Up

Natural Gas Prices Continue to March Down

How Low Can They Go?

Natural Gas Prices – Get Real

 

 

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Three Years Ago

Just about three years ago, on April 19, 2012, the prompt-month (see Note 1) natural gas futures contract closed at $1.91 per mmBtu, a twelve year low.  On April 9, 2015, the prompt-month contract closed at $2.53 per mmBtu.

Are natural gas prices higher now, in April 2015, than they were in April 2012?

The answer is yes and no.

The current prompt-month contract is certainly higher than the prompt-month contract was three years ago.  In fact, it is 32.6% higher.

Looking at the 12 month futures-strip (see Note 2), the simple average price (see Note 3) of natural gas is 10.0% higher than it was three years ago.

The simple average price of the 24 month strip is essentially unchanged.  But, further into the future, prices are lower than they were three years ago—surprisingly so.

The 36 month strip is 4.4% lower.  The 60 month strip is 9.3% lower.

The graph below shows the full term of the futures curves at the two points in time.  The current curve is 13.4% lower.

The current prompt-month contract is certainly higher than in April 2012.  However, prices further out the futures curve have dropped significantly since.  The current futures curve does not even approach $5/mmBtu over its life.  The market expects natural gas prices to remain low for a long time.  For energy consumers with natural gas load, this market represents a golden opportunity to lock in low prices.  How long will this favorable natural gas market last?  That is the subject of another article.

Note 1 – The prompt-month contract, also known as the near-month contract, refers to the futures contract month that is closest to expiration.  For example, during April 2015, the prompt-month contact was for delivery during May 2015.

Note 2 – Futures-strip refers to futures contracts for two or more sequential delivery months.  For example, the 12-month futures strip during April 2015 spans the months of May 2015 through April 2016.

Note 3 – The simple average price of a futures-strip is just that, the simple average of all of the monthly prices in the strip.  This is as opposed to a load weighted price in which each monthly price is weighted by the amount of load an energy buyer expects to use during each of the months in the futures-strip.

Data from the US Department of Energy, Energy Information Administration and the Chicago Mercantile Exchange.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

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Natural Gas Market Update

Over the past 12 months, natural gas prices have fallen 52%.

Looking ahead, the graphs below each look at natural gas prices in the futures market starting at two different points in time: June 24, 2014 and January 5, 2015.  The first graph extends two years into the future and the second graph five years.  The “average price” represents the simple average of all of the futures month prices in each series.  Since June, natural gas prices over the future 24 months have fallen about 26% and over the future 60 months about 19%.

Natural gas (and electricity prices) are currently attractive making this a good time to consider locking in your supply needs.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2015 by Avalon Energy® Services LLC

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Are Crude Oil and Natural Gas Reconciling?

Crude oil prices have dropped 38% since June for two reasons.  Shale oil production in the US Bakken, Eagle Ford, and Permian basins has increased dramatically – by more than 4 million barrels per day since 2008.  At the same time, worldwide demand for crude oil has declined as a result of slowing economies in China and Europe.

Starting in January 2012, the US crude oil benchmark, West Texas Intermediate (WTI), bounced around $100/Bbl (dollars per barrel), rose above $105/Bbl in June this summer, and is now trading below $65/Bbl.  Natural gas prices fell below $2.00/mmBtu (dollars per million British Thermal Units) during April of 2012, rose above $6/mmBtu during the Polar Vortex during January of this year, and have since fallen below $4.00/mmBtu.

The graph below presents crude oil and natural gas prices on an energy equivalent basis in common units of $/mmBtu.  Starting in January 2012, crude oil bounced around $17/mmBtu, rose above $18/mmBtu in June this summer, and is now trading below $12/mmBtu.

We reported previously on the once wide gap between crude oil and natural gas energy equivalent prices:  Crude Oil and Natural Gas Get a Divorce and Crude Oil and Natural Gas Move To Different Hemispheres.

During April 2014, crude oil reached more than nine times the energy equivalent price of natural gas.  That ratio is now 2.8X.  The graph below shows how this ratio has fallen over the last three years.

While crude oil prices and natural gas prices exhibit little correlation, crude oil prices are highly correlated with fuel oil and diesel prices.  Implications of a declining crude oil to natural gas price ratio include:

  • As natural gas prices spike in pipeline capacity constrained markets this winter, it may be more economical to use fuel oil for power generation than natural gas.
  • The economics associated with converting residential fuel oil furnaces to natural gas become less compelling.
  • The economics associated with converting diesel or gasoline fueled vehicles to compressed natural gas or electricity will worsen, and the payback period associated with existing conversions will be extended further out in time.
  • US liquefied natural gas (LNG) exports will become less competitive in overseas markets where natural gas prices are contractually tied to crude oil prices.
  • Petrochemical facilities that can use both crude oil and natural gas as feedstock may switch more and more to crude oil.

It now appears that crude oil and natural gas may be moving back to the same hemisphere and, possibly, reconciling.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

Notes:

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2014 by Avalon Energy® Services LLC

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Natural Gas Market Update

The above graph looks at natural gas prices going back to January 1997.

Natural gas prices have retreated from the Polar Vortex bump and remain relatively low by historical standards.

The prices plotted above are not adjusted for inflation.  If they were in 2014 dollars, the left side of the curve would be more elevated.  In real dollars, today’s prices are lower than they appear on the graph.

Looking to the futures market, the effects of the Polar Vortex lingered into the summer over concern about whether or not there was sufficient supply of natural gas to refill storage after the dramatic drawdowns during January and February.

This is highlighted on the left side of the blue line above which plots the 36 month futures curve as of 4/29/14.  This curve is backwardated, meaning the months close in time were priced above the months further out in time.

The near dated months have since retreated as concerns about storage refill have diminished because of (a) greater natural gas production than expected, and (b) unusually mild summer weather reducing summer time electricity load and the related reduced demand for natural gas.

This is highlighted on the red line above which plots the 36 month futures curve as of 10/24/14.  The months closer in time have declined significantly with the December ’14 contract down $1.26/mmBtu or 25%.  The entire curve has declined as well, though to a lesser extent.   The futures curve is no longer backwardated.

The table above shows the simple average of the monthly prices of the 36 and 48 month forward curves as of 4/29 and 10/24.

Overall, the 36 month futures curve is down 14.7% while the 48 month curve is down 12.7%.

The graph above looks further ahead at the 60 month futures curve which indicates that the market expects prices to rise.

While the curve is upward sloping, five years into the future, natural gas is trading well below $5/mmBtu.

Summary:

Over the past six months, market sentiment has swung from concerns that natural gas supply cannot keep up with storage injections – and upcoming winter demand – to the reverse.  Now the talk is more about an oversupplied market.  While there is low correlation between crude oil and natural gas prices, the recent decline in crude oil prices has contributed to overall bearish sentiment.  Generally, the best time to go long is when the market sentiment is most negative.  We may be approaching that point for natural gas.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

Notes:

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2014 by Avalon Energy® Services LLC