Bull/Bear Summary October 2015

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BEAR DRIVERS – Factors driving prices lower

· EIA gas drilling productivity report

January shale/tight gas drilling production reported at 44.8 Bcf/d; 17.9% increase Y/Y and 1.3% increase M/M
Feb shale gas drilling forcasted at 45.4 Bcf/d; 18.0% increase Y/Y and 1.3% increase M/M

· Natural gas speculation- Funds' position

o Position for Non-Commercial futures & swaps was short 81,835 contracts on Feb 10, an increase of 25.4% from Jan. 27. This is the largest short position since Mar. 2012

· Energy storage

o Advanced Rail Energy Storage is a new technology to provide grid-scale energy storage by replicating pumped-storage hydro with rail cars going up and down a hill.

· ERCOT transmission development

o ERCOT announced $950 million in transmission improvements for the west load zone's growing Permian Basin load by 2020.

o West zone's peak load has increased over 40% since 2010.

· LNG export capital

o Lower oil and natural gas prices are putting completion of LNG export projects at risk, reducing future demand of natural gas by up to 5 Bcf/d.

Bearish economic indicators

oBaltic Dry Index: 530 on February 13, 2015, the lowest level since 1986.

BULL DRIVERS – Factors driving prices higher

· Short term weather

o the 1-15 day is forcasting below normal temps for the eastern half of the U.S.

· Nuclear Energy decline

oFitch Ratings is forcasting 8,000 MW of nuclear generation to retire before the expiration of their operating licenses.

Coal stockpile inventory

oNov. U.S. electric power sector coal stocks estimated at 41,742 thousand short tons, a 9.0% decrease Y/Y. U.S. coal production for Jan. is estimated at 85.8 million short tons, up 3.4% Y/Y.

MISO offer price cap waiver

o FERC approved MISO's request to temporarily waive their $1,000/MWh offer price cap this winter to allow generators to recover verifiable costs due to extreme fuel costs.

Bullish economic indicators

o U.S. freight carloads up 4.7% Y/Y for week ended Feb. 7

o Dow Jones Index at 18,019.35 on Feb. 13, up 12.4% Y/Y

o GDP Projection: 2014=2.4%; 2015= 3.2%; 2016= 2.5%

o Jan unemployment rate increased 0.1% to 5.7%

o Jan total nonfarm payrolls increased by 257,000

o Jan Manufacturing ISM reported PMI at 53.5%

· Natural gas storage level

o Current storage level at 2,268 Bcf

o Y/Y surplus of 542 Bcf; deficit to 5-yr. avg. of 11 Bcf

o March 31, 2015 estimate of 1,600 Bcf

MARKET OBSERVATIONS

Hedging: Understand your risk tolerance and hedge accordingly
- NYMEX natural gas Mar-Dec 2015 trend indicates that $2.75 - $3.05 is the current “hedge something” range
- Indiana Hub electric wholesale Feb-Dec 2015 trend indicates that $32.00 – $34.50 is the current “hedge something” range

< Bulls and Bears September 2015

Bulls and Bears Report- November 2015 >

Bull/Bear Summary October 2015

October 6th, 2015 at 7:30 pm

BEAR DRIVERS. FACTORS DRIVING PRICES LOWER.

 EIA gas drilling productivity report



Renewable energy - ERCOT

 LNG exports

 Short term weather

 Natural gas storage level

 Bearish economic indicators

BULL DRIVERS. FACTORS DRIVING PRICES HIGHER.

Resource plan - PJM

 Michigan reserve margin

 Domestic energy policy

 Transmission development

 Natural gas rig count

 Bullish economic indicators

MARKET OBSERVATIONS

Hedging: Understand your risk level and hedge accordingly.

NYMEX natural gas Nov-Dec 2015 trend indicates that $2.60 - $2.90 is the current "hedge something" range

Indiana Hub electric wholesale Oct-Dec 2015 trend indicates that $30.00 - $32.00 is the current "hedge something" range

BEAR DRIVERS

Factors driving prices lower



EIA gas drilling productivity report

Sep. shale gas drilling actual at 45.0 Bcf/d; 7.5% increase Y/Y and 0.4% decrease M/M.

Oct. shale gas drilling forecasted at 44.8 Bcf/d; 6.1% increase Y/Y and 0.5% decrease M/M.



Renewable energy - ERCOT

ERCOT set a new wind generation record on Sep 13, reaching 11,647 MW. The state of Texas has about 15,500 MW of installed wind capacity.



LNG exports

Global LNG projects continue to be at risk as demand growth slows and prices decrease. Earlier this year, Moody's forecasted most of the proposed LNG projects in the U.S. would be canceled.

Short term weather

The 6-15 day forecast is normal to below average for the Midwest to the east coast.



Natural gas storage level

Current storage level at 3,440 Bcf

Y/Y surplus of 466 Bcf; surplus to 5-yr. avg. of 148 Bcf

Oct. 31, 2015 estimate of 3,900 Bcf



Bearish economic indicators

U.S. freight carloads down 5.5% Y/Y for week ending Sep. 19, 2015 and down 4.4% year to date.

Dow Jones Index at 16,314.67 on Sep. 25, down 3.7% Y/Y and down 8.5% year to date.

Baltic Dry Index: 943 on Sep. 25, a 11.3% decrease Y/Y

BULL DRIVERS

Factors driving prices higher



Resource plan - PJM

PJM proposes to raise the minimum capacity reserve margin by 5% to 16.6% due to reduced excess capacity from regions outside of PJM and an increase in the average forced outage rage of the PJM generation fleet.



Michigan reserve margin

The Michigan Agency for Energy forecasts the Lower Peninsula will have an electric capacity shortfall in 2016 due to the 25 coal units that have or are retiring by 2020.



Domestic energy policy

The House Energy and Commerce Committee endorsed a bill to lift the ban on crude oil exports from the U.S.



Transmission development

FERC suspended PJM's $551 million proposed transmission enhancements cost allocation method to determine if the costs are just and reasonable, possibly delaying up to 61 transmission projects.



Natural gas rig count

U.S. natural gas rig count at 197 on Sep. 25, a 41.7% decrease Y/Y



Bullish economic indicators

Aug. unemployment rate 5.1%, a 0.2% decrease from July

Aug. total nonfarm payrolls increased 173,000.

July retail sales increased 0.2% M/M and 2.2% Y/Y

Sep. Michigan Index of Consumer Sentiment at 87.2, a 5.1% decrease M/M and a 3.1% increase Y/Y