January 2014-Brent vs. WTI Prompt-Month Contract Analysis with ZEMA
Figure 1: NYMEX Crude Prompt-Month Contract (January 2014)
On the New York Mercantile Exchange (NYMEX), crude oil prices for NYMEX prompt-month contracts dropped by more than 3% for Brent and Western Texas Intermediate (WTI) by the end of the fourth week of January 2014 when compared to December 2013.
By the end of the fourth week, the NYMEX Brent prompt-month contract dropped to $106 USD/bbl from $109 USD/bbl, almost equaling the past twelve month average. Meanwhile, WTI declined by $3 USD/bbl to $94 USD/bbl, the lowest level since March 2013. The Brent-WTI spread closed around $12 USD/bbl, $4 USD/bbl above the twelve month average.
WTI was under pressure as U.S. service industries expanded at a slower pace than what was forecasted in the previous month and U.S. fuel supplies rose. In early January 2014, a government report showed bigger-than-expected gains in gasoline and distillate supplies along with tepid demand—findings that supported the decline in WTI prices.1 EIA reported that domestic crude production rose to 8.15 Mbpd, the highest level since September 1988.1 Also, inventories at Cushing, Okla. rose to 40.7 million.1 It is clear that inventories are high, but momentum is low. Although the market is supported by cold temperatures, temperature alone was not enough to push prices high in this well-supplied market.
After months of disruptions in production, Libyan oil production rose to 600,000-650,000 bpd.2 In the third week of January, OPEC reported that global demand for its oil fell by 0.5 Mbpd to 29.9 Mbpd. OPEC expects demand to decline further this year, which will extend Brent’s slide.3
January 2014-Brent vs. WTI Forward Curve Analysis with ZEMA
Figure 2: NYMEX Crude Forward Curve (January 2014)
On the New York Mercantile Exchange (NYMEX), crude oil futures slid as strong U.S. domestic production and weak economic data coincided with weaker-than-expected Chinese data, a coincidence which raises concerns about the world’s economic state. Brent for March delivery fell by $2 USD/bbl and was traded at $107 USD/bbl, whereas Western Texas Intermediate (WTI) futures dropped to $94 USD/bbl for same-month delivery. From December 2013 to January 2014, crude forward contracts until September 2019 dropped by $2 USD/bbl and $3 USD/bbl for Brent and WTI respectively, widening the Brent-WTI spread to $13 USD/bbl.
The U.S. Labour Department reported that the U.S. economy added only 74,000 jobs in December 2013, well below expected levels by 122,000 jobs. The labor participation rate fell to an almost 35-year low of 62.8%.1 The Labour Department’s monthly job reports are closely watched by oil traders, as these reports show the economic health of the world’s biggest crude oil consumer. The Federal Reserve is scheduled to meet in the final week of January to review the economy and, perhaps, assess its tapering policy. On the other hand, the opening of the southern leg of the Keystone XL pipeline is expected to reduce a bottleneck at a key storage hub (the projected delivery rate for the southern leg prior to the end of 2014 is 520,000 bpd).2This development helps alleviate a supply glut in Cushing, Okla. As a shale gas revolution has boosted U.S. oil output to record highs, a large amount of crude remains trapped in storage tanks due to a lack of infrastructure that can connect crude storage to existing refineries.
Brent futures also declined after the preliminary HSBC China Manufacturing Purchasing Managers’ Index for January fell to a six-month low of 49, signaling economic contraction.2 This weaker-than-expected data concerns traders, as China has the world’s second-largest economy and has high energy demands.2
January 2014-North American Natural Gas Spot Price Analysis with ZEMA
Figure 3: ICE North American Natural Gas Spot Prices (January 2014)
Although heavy winter storms and frigid weather conditions have been experienced in most parts of the U.S., California enjoyed mild winter temperatures. These mild temperatures caused a moderate demand for natural gas products in the West Coast; however, demand was very different on the East Coast.
On the Intercontinental Exchange (ICE), North American natural gas spot prices experienced unprecedented fluctuations in January when compared to the last month in three out of four major hubs: PG&E Citygate in California, Chicago Citygates, Henry Hub, and New York Transco Zone 6. From December 2013 to January 2014 (week ending January 21, 2014), monthly average prices surged in Henry Hub by 5% to $4.37 USD/MMBtu, in Chicago Citygates by 82% to $8.3 USD/MMBtu, and, most remarkably, by 191% in Trans Z6 to $19.4 USD/MMBtu. On the other hand, spot prices for PG&E Citygate in California dropped by 3% to $4.54 USD/MMBtu.
For the week ending January 22, 2014, EIA’s Natural Gas Weekly Update reported that natural gas spot prices rose in most of the country, particularly in the Northeast, where record high prices were traded due to extremely cold weather conditions in densely populated areas.1 As a result, gas consumption increased significantly as temperatures fell drastically. From the third week of January to the fourth, total natural gas consumption rose by 18.9%, whereas the residential/commercial sectors in the Southeast and Midwest were driving the surge. In Trans Z6, spot prices jumped to an all-time high of $90 USD/MMBtu.2 The price surge along the East Coast highlights how a cold shock can cause demand for natural gas to skyrocket. The fact is, despite the pipeline network’s high inventory levels, the network cannot meet demands in certain markets.2
January 2014-Henry Hub Natural Gas Forward Curve Analysis with ZEMA
Figure 4: ICE Henry Hub Natural Gas Futures (January 2014)
On the Intercontinental Exchange (ICE), natural gas futures at the U.S. benchmark Henry Hub in Erath, LA, rose by 2% in the weeks of January 2014 compared to last month. Henry Hub futures increased from $4.18 USD/MMbtu in December 2013 to $4.25 USD/MMbtu by the end of the fourth Friday of January 2014 for the following twelve months.
For the week ending January 22, 2014, EIA’s Natural Gas Weekly Update reported that February natural gas futures reached their highest level since June 2011 due to weather forecasts for persistent cold weather and resulting strong storage withdrawals.1
According to the Wall Street Journal, as the blast of Arctic air increased residential heating demands and caused gas futures to be traded at $4.463/MMBtu on Dec. 23, 2013–the highest level in two-and-a-half years–many power companies started switching to coal instead of gas to meet peak demands.2 This switch to coal may have reduced commercial demand for natural gas although gas inventories were at a five-year low at the beginning of the month due to high demands.2 Lingering extreme cold temperatures kept gas prices high for the next eight weeks, but the MDA’s prediction that warmer weather is on its way affected market speculations about peak demand.3
January 2014-Actual Weather Analysis with ZEMA
Figure 5: AccuWeather Daily Temperature (January 2014)
From December 2013 to the fourth Friday of January 2014, winter’s arrival heralded frigid temperatures across almost the entire U.S., except for the West Coast. The monthly average temperature in Sacramento increased by three degrees Celsius to 10C, whereas the monthly average temperature in Chicago dived by seven degrees to -15C, in Raleigh by five degrees to 3C, and in New York by six degrees to -4C. At the beginning of the New Year, the city of Chicago reached a record low temperature of -40C, but emerged from this deep freeze in the following days.
In all observed cities except for Sacramento, this year’s January turned out to be below the two-year average. Comparing the past two-year average of January temperatures to January 2014, this year felt colder than the two-year average in Chicago by 9 degrees, in Raleigh by 4 degrees, and in New York by 3 degrees. By contrast, Sacramento City experienced a milder winter, as the past two-year temperature average for January was 2 degrees lower than that of January 2014.
Figure 6: AccuWeather Monthly Temperature (January 2014)
January 2014-North American Electricity Day-Ahead Price Analysis with ZEMA
Figure 7: ICE North American Electricity Day-Ahead (January 2014)
On the Intercontinental Exchange, electricity day-ahead prices spiked in all the observed North American markets except the West Coast for the week ending January 24, 2014. From the previous month to January 2014 (week ending January 24), the day-ahead monthly average prices surged. Prices surged in PJM North by 207% to $115 USD/MWh, in ISO-NE by 60% to $181 USD/MWh, and in NYISO by 113% to an unprecedented $194 USD/MWh. By contrast, electricity day-ahead prices dropped in CAISO-SP15 by 7% to $49 USD/MWh as the West Coast experienced mild weather temperatures.
In one of the coldest winters in decades, ISOs in the Midwest and East Coast issued notices about the impact of cold weather on generation and distribution. To fully grasp the seriousness of supply constraints, PJM sought to temporarily lift the $1,000/MWh price cap for generators. Following in PJM’s footsteps, NYISO also sought a similar FERC approval to lift its $1,000/MWh price cap and compensate plants.1 Extreme weather conditions and unprecedented price volatility in Northeastern power markets made generators push for new mandates. The Northeast region reacted to these extreme weather conditions with upward spikes in wholesale power prices, the result of commercial and residential consumers’ struggle to procure natural gas supplies. The record-high winter peak demand along with unexpected outages of power plants and natural gas equipment drove peak electricity prices. Although many major natural gas pipeline projects came in service ahead of the 2013-14 winter, natural gas supplies to New York City remained constrained during extreme weather conditions.2