The weather forecast for July and August looks pretty bullish for natural gas and power prices, according to WSI Inc. Meteorologists at WSI are calling for warmer than normal weather in most regions of the country for both months, except for the North Central region in July -- North Dakota, South Dakota and Minnesota should see colder than normal temperatures in July.
"The strongest indications for heat relative to normal are across the South while the Northeast should experience much more variable weather this summer with numerous hot spells broken by extended stretches of cool weather," said Todd Crawford, WSI's seasonal forecaster.
The trend toward higher temperatures will increase power loads providing bullish conditions for power prices as marginal costs increase, consultants at Energy Security Analysis Inc. (ESAI) said in an analysis of the WSI forecast. "The power sector is increasingly relying on natural gas to meet growing summer load demand," the consultants noted. "Higher loads with warmer temperatures will increase demand and provide a bullish backdrop for natural gas prices as the injection rate to storage may slow. Cooler temperatures in the North Central states will not provide much [of] a significant offset to higher gas demand in the other regions."
The August peak demand period looks even more formidable with warmer than normal temperatures forecast for the Northeast, Southeast, Northwest, North Central (particularly Minnesota and the Dakota), South Central (except Oklahoma and Kansas) and the Southwest (particularly Nevada and California).
The increased use of peaking units in August could be "very bullish for power prices," ESAI consultants said. "Natural gas demand will continue to be strong with most regions depending on gas-fired units for summer peak conditions. Slow injections of gas to storage in both July and August will be bullish for the market."
The consultants also expressed concern about the stress on peaking and mid-merit generation capacity and the impact of potential outages. "Forced outage rates tend to increase as time goes on during a long hot summer or toward the end of a prolonged heat event. These outages can exacerbate an already bullish market situation.
"Particularly warm temperatures in the Northwest could have an impact on hydro availability and increase the use of gas in California markets which would increase gas demand in that region and would be bullish for power prices."
The outlook changes significantly in September, when some cooler than normal temperatures are expected in the Northeast (particularly Pennsylvania and New Jersey), the Southeast (except for Florida) and the South Central (except for Texas). Nevertheless, warmer than normal temperatures should continue in the North Central (except for Wisconsin and Illinois), the Northwest and the Southwest, WSI predicted.
"Cooler than normal weather in September should relax demand for gas in [the eastern and South Central] regions," ESAI said regarding the forecast. "The likelihood of a late season heat event diminishes with this forecast for the eastern markets. Western markets will be warmer than normal and the continued warm temperatures in these markets will be bullish for power prices."
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