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IMA Energy & Environment Blog

Eight Factors Impacting Summer Energy Prices

By Constellation, from Constellation’s Energy4Business blog

The past few months brought energy prices to record lows, making it a great time to lock in purchases. What other trends can we expect to see in the next few months, and how will they affect your company’s utility bills? Constellation Director of Portfolio Management Keith Poli shared a number of factors that could impact summer energy prices in a recent webinar. Here are eight of them.

California’s Drought Conditions

Over 50 percent of the state remains in exceptional drought conditions. Water restrictions are getting worse, and we’re entering the dry season now. Reservoir levels are low. The current snowpack at the end of March was only 5 percent of the normal supply, so that’s a significant amount of hydro supply that won’t be available to the market through June. This is already leading to an increased demand for gas-fired generation, as well as solar power.

A Warm Summer Forecast

The National Weather Service is calling for a weak to moderate El Nino, bringing high temperatures to the West and slightly above-average temperatures for the Great Lakes Region and East Coast. Typical El Nino conditions cause above-average temperatures in the West, Great LAkes and Southeast. This is also likely to spur greater demand for gas-fired generation.

Impact of Oil Decline

We’ve seen a 50 percent reduction in oil prices since October, saving the average family $500 to $700. While the drop in oil prices has put more dollars in consumers’ pockets, we have yet to see a correlated boost in retail sales. Ultimately, there could be a negative impact to the economy for energy-rich states, such as Texas and North Dakota.

High Natural Gas Production Continues

We currently have a surplus of natural gas, which has contributed to lower prices.

Natural gas production averaged 73 Bcf/d in early April, and the Energy Information Administration predicts it will increase by about 5 percent this year.

We may not see a cut in production until the later part of 2015 or 2016. Declining rig counts have yet to result in lower gas and oil production due to a backlog of drilled wells, increases in drilling technology and efficiency, and a shift to drilling only the most productive wells. If declining rig counts eventually lead to slower natural gas and oil production this year, this could reduce the current oversupply, resulting in more price stability.

Long-Term Drivers

We ended April with working gas inventories at a 75 percent surplus compared to last year, but an 11 percent deficit compared to the 5-year average. If summer weather is cooler than expected or gas production continues to grow faster than expected, we may see a pullback in prices and robust injections, which we will need to limit to manage storage and avoid an oversupply.

Nuclear Plants Will Go Back Online After Outages

During spring and fall, nuclear plants go down for refueling. Peak outages are expected to reduce total outages to 80,000 megawatts, but by early May, the return of these units will increase total output once again.

Liquid Natural Gas Projects

There are currently no operational exports, but four liquid natural gas projects are underway right now. We expect other projects to come online in 2016-18. If further projects are built, demand could grow to as high as 10 BCF a day, which will help balance the gas market in the future.

Exports to Mexico

In 2013, Mexico made changes in its constitution to open infrastructure to foreign investments. The U.S. is currently exporting about 2.5 Bcf/d of gas to Mexico, and Mexico’s energy ministry estimates these exports could reach as high as 3.8 Bcf/d by 2018. U.S. exports. Exports to Mexico could be a key factor in balancing storage this summer if production falls ahead of schedule and storage capacity becomes tight this fall.

In the long-term, exports to Mexico could feed growing demand for liquid natural gas. We’ll continue to watch the summer’s forecast, monitor supply and keep an eye on prices over the next few months.

You can keep an eye on these trends, too, with Constellation’s online energy management tools and resources, including our webinars. What will the rest of summer have in store as oil prices continue to fall and new regulatory changes take effect? Join us for our next webinar at 1 p.m. CDT June 17 for an updated market outlook. 

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