Oil Prices in Free Fall

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Revisiting an article originally published 12.16.14

Oil prices dropped dramatically in the second half of 2014.  The supply and demand imbalance pressured the price to drop almost 50% in the 6 months between June and December.  At the time, we discussed OPEC’s decision not to cut production which continued to saturate an already over-supplied market. OPEC believed U.S. producers would not be sustainable at the lower price of oil.  By enduring some short-term pain, OPEC reasoned they would be able to retain market share and position themselves to benefit from an anticipated rebound in price.

 How has this played out?

Oil followed a steady decline to a low of $43.46 in March of 2015.  It seemed like a “bottom” had formed as oil rebounded, hitting $61.43 in June.  However, the market reverted back to the fundamentals of an oversupplied condition, dropping 44% over the remaining two quarters of 2015 to settle at $31.29 as of this morning.  What’s more, Morgan Stanley, Bank of America, and others project oil reaching $20 in the next 6 months.

Source: CME Group

Source: CME Group

The low price of oil has affected the major producers.  Saudi Arabia, the largest member of OPEC, has increased the price of gasoline in their own country by 50% (the government’s main source of revenue is oil) because they can no longer sustain government subsidies.  Meanwhile, in the United States, oil production peaked in April 2015 and has been declining since.  In fact, many producers are teetering on the brink of bankruptcy.  However, while U.S. production is declining, it remains at levels last seen in the 1970s and is contributing to the oversupplied global market.

Supply Outlook

OPEC is continuing with their strategy to keep production high in order to retain market share and force out the U.S. producers unequipped to operate at such low margins.  The tremendous growth in production since 2008 has and will continue to decline as more and more U.S. producers feel the pressure of low oil prices.  In fact, OPEC recently stated that weakening supply growth outside of OPEC will cause oil to reach $80 per barrel by 2020.

The logical assumption that demand will increase in the face of lower prices is currently being met with fears of the Chinese economy slowing at a significant pace.  A slowdown in China can have a major impact on global demand as China is the third largest consumer of oil, behind North America and Europe. Oil consumption in North America was flat between 2010 and 2013 and Europe’s consumption dropped 7% during that same period.  The spotlight is on China because it consumed 17% more oil in 2013 than it did in 2010.  If consumption in China flattens out, global demand weakness will be very real.

Recovery

In 2016, supply will continue to outpace demand and the price of oil will continue its downward slide until some equilibrium is reached.  Long-term, the price of oil will rebound; it’s just a question of when.  The recovery may be a bumpy ride as higher prices will allow high-cost producers to jump back into the game – increasing supply and lowering prices.

Source: EIA

Source: EIA

Impact on Natural Gas and Power Procurement

The price of natural gas and electricity generally do not correlate to the price of oil.

For the most part, natural gas is driven by domestic factors while oil is an international commodity.  Like oil after the shale revolution, natural gas has seen a dramatic influx of supply since 2008.  The oversupply and low cost of natural gas caused pipelines to be rapidly developed and, as of April 2015, natural gas has become the most used source for electricity in the United States, surpassing coal.  The demand story for natural gas is much different than oil because there’s a clear trajectory for increased demand in electricity generation.

Source: EIA

Source: EIA

As the price of oil does not directly impact the price of natural gas, we also can say it does not directly impact the price of electricity.  Cheap natural gas currently generates much of the electricity in the United States, keeping the price of electricity down.  Electricity rates, however, are comprised of additional components independent of the fuel source, mostly dedicated to maintaining grid reliability, which tend to increase over time.

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MCEnergy is Now a Division of Yardi!

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As you may have heard, MCEnergy was recently acquired by Yardi Systems.  I and each member of the MCEnergy team are excited to be part of Yardi’s Commercial Energy group. The MCEnergy team will provide the same services and remain in the same office. I will continue to lead the staff, and ensure continuity for our clients.
I want to thank all of our clients; you have been very supportive of our efforts over the past 20 years and we welcome the opportunity to provide an even greater level of service through the integration of MCEnergy with Yardi.
Long-term, our combined goal is to leverage the resources available through Yardi to strengthen MCEnergy’s offerings and roll out the MCEnergy model more significantly across the country. Yardi Energy has many additional products that we are enthusiastic about offering you, and we will be applying our expertise to the development of an even greater range of products and energy services that will help you save money and manage energy related revenues and expenses.
We are looking forward to our future as part of the Yardi family, and are thrilled for the new opportunities and resources we will be able to provide for our clients. Thank you for your continued support of MCEnergy, now a division of Yardi.
Best Regards,
Meg Carey and the MCE Team
 
About Yardi:
Now in its fourth decade, Yardi® is committed to the design, development and support of software for real estate investment management and property management. With the Yardi Commercial Suite™, the Yardi Multifamily Suite™, Yardi Investment Suite™ and Yardi Orion® Business Intelligence, the Yardi Voyager® platform is a complete real estate management solution. It includes operations, accounting and ancillary processes and services with portfolio-wide business intelligence and platform-wide mobility. Yardi is based in Santa Barbara, Calif., and serves clients worldwide from offices in North America, Asia, Australia, Europe and the Middle East. For more information, visit www.yardi.com.
 
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Supreme Court Rejects EPA’s MATS Rule

The Supreme Court Building in Washington DC

The Supreme Court Building in Washington DC

On June 29, 2015, the Supreme Court rejected the EPA’s Mercury and Air Toxics Standards (MATS).  The decision overturns the D.C. Circuit Court’s ruling which found the EPA acted within its right under the 1970 Clean Air Act.  The EPA issued MATS in 2012 and intended to reduce the amount of mercury emissions from coal plants, saving the American people $37 to $90 billion annually.  The Supreme Court ruled the EPA did not consider the costs involved for generators to comply.

MATS was set to be one of the costliest regulations the EPA had ever crafted at $9.6 billion annually.  In order to comply with MATS, coal-fired generators would either have to install costly pollution control technology or be retired by the April 2015 deadline.  In fact, due to the timing of the Supreme Court’s decision, many thousands of megawatts of coal plants have already been retired.  But not all coal plants have complied. Coal plants representing 20% of U.S. generating capacity were granted extensions to meet MATS requirements.  These plants will continue to operate as usual, for now.

Uncertainty surrounds whether or not the EPA will be able to rework MATS.  Many plants will now avoid operating costs by not running already installed pollution control technologies.  The ruling is unlikely, however, to bring retired plants back into the fold.  Coal plant retirements have been due to more than just MATS.  Retired plants tend to be old and inefficient and are being replaced with new natural gas-fired generators due to low natural gas prices.  We are unlikely to see retired coal plants return.

The effect on the market appears to be minimal.  As stated above, many plants have already implemented a compliance strategy and do not plan on reversing course.  If natural gas prices continue to remain so low, coal to gas switching will become more prevalent based on economics alone.

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What’s the Deal with the Keystone Pipeline?

The proposed Keystone XL pipeline has been one of the most polarizing political issues of recent years, with valid arguments on both sides of this issue.

The 1,179 mile long pipeline will pipe oil from Alberta, Canada between existing pipelines in Nebraska and refineries in the Gulf Coast.  Proponents claim the pipeline will bring a boost to the economy by creating jobs and lowering gasoline prices.  Others oppose the pipeline on the grounds that it would be carrying dirty oil, exacerbate climate change, and increase the risk of oil spills in the United States.

A common talking point of proponents of the Keystone XL pipeline is that it will be a job creator. A report by TransCanada, the company behind the pipeline, states that nearly 45,000 jobs will be created with the construction of the pipeline.  However, some estimations show only 9,000 construction jobs to complete the project and 50 permanent jobs to maintain and operate the pipeline after completion.

Opponents of the bill say that the pipeline will deliver oil which creates about 17% more greenhouse gasses than average.  Realistically, the oil from Canada will be brought to global markets with or without the Keystone XL pipeline.  Increasingly, Canada is using more dangerous methods of transportation such as truck and rail to bring their oil to market.  Finally, the Keystone XL pipeline would only be a small fraction of the existing pipelines that transport oil throughout the United States.

Looking at the bigger picture, the Keystone XL is simply just a small part of a vast web of interconnected pipelines.  It will not have a major impact on our economy, nor the price of gasoline, but it would be a safer alternative than transportation by rail.  The real issue at hand is how our nation should be investing for an energy independent future, by balancing cost effective and clean energy production in the United States.

On January 21, 2015, just one day after President Obama’s State of the Union address, Senate democrats created an amendment to the Keystone XL bill which would require Republican senators to take a stand on the merits of climate change.  It was brought to an overwhelming 98-1 confirmation that climate change is real.  This is a monumental step forward for both sides.  Republicans are one step closer to approving the Keystone pipeline, and democrats are one step closer to addressing the impacts of climate change on the future.

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Oil Prices in Free Fall

Supply and demand dynamics have caused the price of crude oil to plunge 48% since this summer’s peak.  While oil prices do not correlate highly with electricity and natural gas prices, what they say about the broader economy is worth paying attention to.

Oil-Ripples-650x360

 

How Did We Get Here?

Crude oil production globally has increased 6% since 2007.  A main driver of this growth is shale oil production in the United States, which has increased total U.S. oil production by 69% since 2007.  During this period, low interest rates and Federal Reserve bond-buying programs have provided cheap financing for the oil and gas industry to explore and develop U.S. shale plays.

Due to this glut of oil on the market, OPEC was expected to cut production at their November 27th meeting; instead OPEC decided to retain their production ceiling and prices dropped approximately 10% over the next few days.

Partial Global Map of OPEC Members

Partial Global Map of OPEC Members, 2014

While the increase in U.S. domestic oil production is remarkable, global oil production has been more modest. Therefore, we must also analyze the global demand for oil. In October the International Energy Agency (IEA) cut its forecast for oil demand growth in 2015 from 1.4 million barrels per day (bpd) increase to a 1.1 million bpd increase.  Energy efficiency and more fuel diversity are responsible for some of the decreased demand growth.  Additionally price weaknesses in other commodities, such as copper, tend to suggest a decrease in demand due to broader weakness in the global economy.

Lower oil prices may drive out high-cost U.S. shale producers, which in turn help stabilize oil’s precipitous drop.  One theory is that OPEC’s decision to retain the current production level was in part to squeeze U.S. shale producers who need high oil prices to run their capital intensive businesses.  Each oil producer has a different break-even point for the price of a barrel of oil, meaning there is no magic number at which all producers will cut production. In general low oil prices will eventually cause U.S. and other high-cost producers to cut production. At this point supply and demand will come in to balance and the price will stabilize. In a world where only the strong survive, OPEC, particularly Saudi Arabia, are betting on themselves.

 

OilPriceDropChart

 

How Does This Affect You?

As you are seeing now, lower crude oil prices will be reflected at the pump and you will be paying less for gasoline. On top of gasoline, residential and commercial fuel oil for heating is also cheaper.  In terms of purchasing electricity and natural gas there is little direct correlation with the price of oil.  The biggest effect on the price of electricity will be during extreme cold weather in the Northeast when dual-fuel generators are forced to switch to oil.  Natural gas is a growing heating source in the Northeast and oil switching occurs when more natural gas is needed for heating.  Low oil prices will alleviate some of the extreme spot pricing we saw in winter 2014 due to fuel switching.  This will help stabilize electricity pricing in the Northeast during extreme cold weather, however only oil generates only 1% of our domestic electricity.

Recommendations

  • Crude oil is the raw material in fuel oil. If you have not purchased heating oil for the upcoming winter you should contact MCEnergy for a consultation today.
  • Crude oil may not have a direct correlation to electricity and natural gas but it is does have an effect on the broader economy. MCE continually watches these markets and can provide insight on purchasing strategies for electricity, natural gas, and fuel oil.  Give us a call at (914) 767-3100 or email at Daniel.Rice@mcenergyinc.com to discuss further.
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Former Treasury Secretary Says Preventing Global Climate Crisis Starts with Carbon Emissions Tax

desolate cityscape

 

“This is a crisis we can’t afford to ignore,” Henry M. Paulson writes in an eye-opening op-ed piece in Sunday’s New York Times. “We can see the crash coming, and yet we’re sitting on our hands rather than altering the course.” Paulson eloquently maps out his argument in favor of a carbon emissions tax, starting in the U.S. and eventually expanding into foreign economies.

It is heartening for us to read Paulson’s article, excellently stating why a carbon tax is a necessary step in changing our environmental and economic future. We at MCEnergy have been backing this idea for years, recognizing that taxing carbon emissions would facilitate responsible energy consumption, while also incentivizing cleaner, affordable energy technologies.

Paulson’s argument for a carbon tax is illustrated through significant comparisons between factors leading up to the 2008 financial crisis to an inevitable energy crisis:

We are building up excesses (debt in 2008, greenhouse gas emissions that are trapping heat now). Our government policies are flawed (incentivizing us to borrow too much to finance homes then, and encouraging the overuse of carbon-based fuels now). Our experts (financial experts then, climate scientists now) try to understand what they see and to model possible futures. And the outsize risks have the potential to be tremendously damaging (to a globalized economy then, and the global climate now).

The economic collapse caused when the credit bubble burst in 2008 was the result of those in power ignoring a responsibility to contain a global problem before it became too big. Paulson observes the clear comparisons between these two situations, and insists that we are on track to repeat the same mistakes if we do not change our course of action.

The former Treasury Secretary’s article presents us with a choice, insisting that there is still time to lessen the human impact of the impending energy crisis; the choice being that we either stand idly by or choose to do something. The most logical solution would be the implementation of a national and eventual global Carbon Tax.

MCEnergy recognizes the significance of Paulson’s words and want to share them with the hope that our clients will continue to involve themselves with making informed energy decisions.

Please take a few moments to read the former Treasury Secretary’s op-ed piece from the most recent NY Times here.


 

Thank you for your time and please feel free to call our team of analysts to discuss this post and other energy-related topics at (914) 767-3100. 

 

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Natural Gas Storage Remarkably Limited: Exploring what this means for short and long term energy pricing


gaspipes

Natural Gas storage injections have fallen short of the expected target (capacity) for two weeks in a row, leaving energy pricing as nothing short of awful. After a winter like we just experienced, where average temperatures in the Northeast and Midwest dropped to 36 and 31 degrees, the lack of natural gas being replenished in a period of such high demand should not be completely unexpected—however, the data coming in is still concerning.

Where there is high energy demand, there are high energy prices to follow, so a pricing increase in the second half of 2014 compared to years prior should and will be expected. This all, of course, depends on the nature of the coming summer months. If the average temperatures are cooler than they have been in prior years, the natural gas inventory will be given a chance to restore to better levels, ultimately leading to ideal pricing in the “shoulder” months.

With the upcoming period of El Niño, we can expect a mild summer, but weather is a variable that is impossible to accurately predict. If the 2014 summer is as harsh as the winter we just experienced, (just replace a polar vortex with sweltering heat waves) we’ll find ourselves expending energy to significant ends, increasing energy demands and causing prices to increase. Let’s hope this does not occur!

At the beginning of this month, inventories stood at 822 Bcf and are -51.6% from last year and -54.7% from the five-year average.

Working gas in underground storage with the 5 year maximum and minimum:

Working gas in underground storage with the 5 year maximum and minimum

Working gas in underground storage with the 5 year maximum and minimum

Natural Gas Intelligence suggests that getting back to last year’s storage levels of 3.8 Tcf will, “require some heavy lifting,” but is possible as long as certain factors fall into place, such as normal weather patterns.

A New York City Scenario

A New York City Scenario

To learn more about the potential risks associated with energy prices please contact MCEnergy.  It is important to understand these risks in order to better manage your energy costs in the future and avoid the “sticker shock” that was so common during the Polar Vortex.

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Westchester Customers Will See an Increase in Their Electricity Costs Come May 1, 2014

skyline

The Manhattan skyline as seen from Nordkop Mountain in Suffern, New York, 30 miles northwest.

What exactly is changing and how will it effect my bill?

The NYISO is making an interesting change. Today, New York City and Westchester are treated as separate “zones” with unique pricing. Come May 1, they will treat them as a single zone. The new zone (called Lower Hudson Valley) will inherit the prices of the old NYC-only zone and Electricity Generators who serve Westchester will suddenly be able to charge an extra 1- 1.5 cent /kWh capacity charge, improving their bottom line.

The thought is that this will be so economically attractive that it will encourage Electricity Generators to build new plants and infrastructure that will serve this zone. Should that happen, long-term, more generation will also be available for NYC and the overall price of electricity in the area should decrease.

Therefore, this short-term pain Westchester customers will see is seen by regulatory bodies as a strategic investment that will improve their long-term ability to reliably serve the NYC grid that will pay-off for all customers over time.

What are Capacity Charges?

One of the many individual charges that make up a full electricity bill is the Capacity Charge. This charge varies based on the cost of getting power from its source to its end user.

When a customer is close to the source of generation and / or in an area where there is a nice balance between the demand and the capability of the transmission grid, the Capacity Charges are low. Customers whose power has to travel long distances or who live in areas where the distribution infrastructure struggles to keep-up with population density and demand pay higher Capacity Charges.

Example: Capacity charges in NYC are typically 3 or 4 times what they are in Westchester as getting power into the City is more challenging / costly than getting it into Westchester due to the concentration of demand in such a small geographic location. This generally amounts to 1.5 cents / kWh more… ( ½ cent in Westchester vs. 2 cents in NYC).

This extra fee goes directly to the company that generates the electricity as a bonus incentive for serving an area in need. These incentives are one of the tools State and Federal regulatory bodies (like FERC on the national level and NYISO on the local level) use to manage and balance local supply of- and demand for electricity.

Whether these incentives work or if those fees should be passed along to the end-user is a blog post for another day…

Please feel free to contact our Energy Analyst Team at 914-767-3100 if you have any questions!

 

 

 

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Incentives Skyrocket for Demand Response in NYC

Rumors about the potential decommission of Indian Point continue to gain traction.  In light of this, new details are emerging about the increased payout of Con Edison’s Commercial System Relief Program (CSRP). 

Demand Response

What makes CSRP different now? In addition to no out-of-pocket expense, the penalties for non-performance have been reduced by 50% in CSRP.  This makes CSRP less onerous on building management and limits downside risk.  In addition to limited risk, the payout for summer 2014 is likely to be four times larger than in the past.  We are looking at CSRP payouts estimated to be $100,000/MW for the five summer months!  It is important to note that CSRP is not the only demand response program in New York City.  Distribution Load Relief Program (DLRP) offered by Con Edison and Special Case Resources (SCR) offered by New York Independent System Operator have also seen increases in incentives.  Combined, the three programs can earn you up to $300,000/MW/Year.

These levels of incentives are unprecedented in New York City, and combined with limited risk, there is absolutely no reason not to act.  The first deadline to enroll in the program is April 1st, 2014, so time is of the essence.  The second and last opportunity to enroll is May 1st, 2014.  Time is of the essence.

The Public Service Commission intends to rule on the specifics of CSRP next week.  With historical payouts on the table and limited risk for this demand response program, it is imperative to begin the discussion on whether your building should be taking advantage.  MCEnergy believes there is no better way to add value via your emergency generation or curtailment strategies you already have in place.

 

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Unprecedented levels of funding expected to be made available in NYC

As we assess the future of our local electricity market, one of the greatest sources of risk is the uncertainty around the future of Indian Point, whose generation currently satisfies 20% of the demand for Zone J. While Entergy, the operators of Indian Point, maintain that the plan is to remain operational, concerns around safety, operational performance and, frankly, the economics of nuclear generation as natural gas generation continues to be more cost effective are cause for concern.

Indian_Point_Nuclear_Power_Plant

 Con Edison and NYSERDA (New York State Energy Research and Development Authority) are actively implementing contingency plans that will allow the grid to respond to the potentiality  – but they recognize the most effective solution will be a team effort made hand-in-hand with building owners / operators.

As such, NYSERDA is in the final stages of securing government funding to offer unprecedented financial incentives to building owners who undertake infrastructure projects that will help manage and reduce peak demand should our generation ability be curtailed as a consequence of an exit by Indian Point.  This level of funding helps projects gain traction.  We want to help you take advantage by buying down your capital investment, enhancing your Net Operating Income, and ultimately increasing the value of your property over the lifetime of ownership.  While the specifics are being finalized and will be published shortly, we can expect 40%-50% cost-sharing (!) depending on the project, with additional cash bonuses for those projects that affect significant reductions in load. (500kW +)

 Types of Projects being Targeted for Eligibility:

  • Installation of Thermal Storage (Ice storage used for backup HVAC)
  • Installation of Battery Storage for Electricity
  • Installations of systems that would enable a facility to participate in Demand Response Programs
  • Building Management Systems that would allow a facility to systematically reduce demand of HVAC systems during peak periods
  • Lighting Efficiency Projects
  • AC change-over projects, moving to Steam as the fuel source
  • Combined Heat & Power / Cogeneration

Incentives are available on a first-come, first-serve basis until funds are exhausted.  Projects must be installed and operational by June 1, 2016 to reap these benefits so we want to help you plan now.  It is important to note that these funds will be available regardless of whether or not Indian point is decommissioned.

Please let us know if you’d like to discuss how you can take advantage of this opportunity or if you’d simply like to discuss any related topics mentioned above as part of a more general operating strategy.

For example:

  • Demand Response Programs can be great revenue source around which there isn’t always a lot of awareness within an organization. If you have emergency generation, you’ve done most of the hard work. Let us tell you more.
  • Battery Storage is fast becoming an attractive and versatile cost-saving option, allowing you to, among other things, “charge up” during off-peak hours and then use that power during the most expensive peak intervals rather than pulling from the grid.
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