Bulls and Bears August 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 July 2015

Bulls and Bears September 2015 >

Bulls and Bears August 2015

August 26th, 2015 at 2:05 pm

BEAR DRIVERS. FACTORS DRIVING PRICES LOWER.

 EIA gas drilling productivity report

 Electric generation costs

 Energy storage

 Short term weather

 Natural gas storage level

 Bearish economic indicators

BULL DRIVERS. FACTORS DRIVING PRICES HIGHER.

 Electric demand

 Power plant retirements

 EPA Clean Power Plan

 PJM uplift charges

 Mercury and Air Toxics Standards

 Bullish economic indicators

BEAR DRIVERS

Factors driving prices lower

EIA gas drilling productivity report

July shale gas drilling actual at 45.4 Bcf/d; 11.0% increase Y/Y and 0.2% decrease M/M.

Aug. shale gas drilling forecasted at 45.2 Bcf/d; 8.4% increase Y/Y and 0.2% decrease M/M.



Electric generation costs

Construction costs for natural gas-fired combined cycle units have been decreasing over the last five years, averaging less than $1,000/kW.

During the first half of 2015, solar installation costs decreased by up to $0.50 per watt, or about 13%.



Energy storage

A report by AECOM predicts battery prices will fall 40-60% over the next five years.

Short term weather

The 1-10 day forecast is normal to below normal for the Midwest.

Weather forecasters are predicting a 90% probability for a winter 2015/2016 El Nino, which favors a warmer than normal upper Midwest.



Natural gas storage level

Current storage level at 2,977 Bcf

Y/Y surplus of 521 Bcf; surplus to 5-yr. avg. of 81 Bcf

Oct 31, 2015 estimate of 3,800 Bcf

Bearish economic indicators

U.S. freight carloads down 4.4% Y/Y for week ending Aug. 8, 2015

BULL DRIVERS

Factors driving prices higher

Electric demand

ERCOT set a new all-time peak demand at 69,783 MW on Aug. 10.

ERCOT announced several conservation alerts.

PJM's peak demand in the first half of 2015 was 143,115 MW, a 1% increase from the first half of 2014.

Power plant retirements

PJM's installed capacity in June was 3.9% lower Y/Y at 176,741 MW

1,600 MW of coal generation is expected to retire in Michigan by 2020 to comply with the Clean Power Plan.



EPA Clean Power Plan

Fifteen states have filed legal challenges in the federal court against the new carbon regulations based on the fact they would be required to spend significant resources to meet the Sept. 6, 2016, deadline for compliance plans.



PJM uplift charges

PJM uplift charges remained high during the first half of 2015 due to high electric generation outages and inflexible natural gas supply arrangements.



Mercury and Air Toxics Standards

The EPA intends to submit their cost justification plans to the U.S. Court of Appeals by spring 2016.

Bullish economic indicators

Dow Jones Index at 17,477.40 on Aug. 14, up 4.6% Y/Y

Baltic Dry Index: 1055 on Aug. 14, a 3.9% increase Y/Y

July unemployment rate 5.3%, unchanged from June

July total nonfarm payrolls increased 215,000 from June