Mike’s Take – Oct 7

Good Morning,

I have a few things to cover this morning, beginning with the fundamentals then a few thoughts on Mid-C Nov and the spreads.  The LA Basin is due for another heat wave, it’s been relentlessly hot and the max temps are nearly equal to what is being seen in Phoenix:

001_BurbTemp 001_Phoenix

The LA heat wave is short lived in the latest forecast lasting but a few days and followed by another cooling while Phoenix remains in the mid to high 90s.  The northwest has really nothing of interest to report on the temperature front, just nice weather:


While the northwest temperatures are mild and pleasant there is some precip forecasted for Kalispell, MT which should be snow north of 5k:


The River Forecast center 10 day forecast remains relatively in line with the STP until you get to days 7 and out where it now is putting a bit more water into the system:


We are now fully into the DC derate, let’s take a look at how the dispatchers are managing the loss of that line.   The following chart plots net flows out of the Mid-C for the last three weeks:


Surprisingly there is relatively little change in those net flows.  Why, you surely are asking, or perhaps you already know.  Most of the loss in the DC exports was absorbed by cuts in BC Hydro exports rendering the event (the DC derate) a non-event, at least for the Mid-C net energy position.


The ISO has seen a slight cut in imports, much less than the total the DC was exporting, as it has increased the loading from Mead and Palo:



The net affect of all of this on the net energy at Mid-C and SP is relatively marginal though overall heat rates are up in the Ansergy forecast at all hubs (NP15, SP15, Palo and even Mid-C):

001_HeatRate_MC 001_HeatRate_NP 001_HeatRate_PV 001_HeatRate_SP

Some of that is driven by the changes in transmission, some by the bullish near-term change in loads, the loss of a Diablo unit, and weak renewables.  WECC demand is projected to be over 5000 MW higher on peak:


and Diablo #1 is off-line for its refuel, expected to be back in early November.  Renewables began the month with a bang and have recently withered to near seasonal lows:


Thoughts on the Market

Now that we have dispensed with the fundies let’s examine the market, beginning with November Mid-C on peak:


Both the market and the forecast have plunged in lock step with each other, though at first glance it appears the recent market prices have tumbled faster and perhaps too much.   Post-derate cash prices should now be reflected in the forward market and I think they are overdone, though one might sit tight until there is some glimmer of Mid-C bullishness…which there isn’t at the moment.

The Nov spread looks interesting, though I think the Dec might be the better trade:

000_TradeRank_SPMCdec 000_TradeRank_SPMCnov

The Dec (top chart) has gone bid in sympathy with early October fundamentals which will not be around in Dec.   The Nov too has gone bid for the same reason but cash won’t help that position for a few weeks – so wait, do nothing.  The Dec, on the other hand, is worth laying wood on (on the short side) and accumulating on rallies (another may happen  with the next mini-heat wave.  I have a few reasons why I think this is approaching the realms of a good short.

First, it is El Nino.  The most recent NOAA index is up to 2.4, tied with the greatest El Nino on record for the same week.  The rains will come, possibly before this month is over.  A hydro system running at a 10% plant factor could see 50% in the course of a week.  Storms means wind, wind means more generation, though along with rain comes  clouds and perhaps the wind rally will be offset by the solar cuts..

From the Mid-C’s point of view there will be cold weather, Winter is Coming, demand will go up, by nearly 6000 MW before the first of December while SP15’s demand will drop by 4000 MW, before the first week of December.  That is a 10,000 MW swing in demand between the two hubs and the only thing that can mitigate the price between the two hubs is water – but I only see big water in the south, not the north; the reservoirs are below normal.

000_MidCdemand 000_SPdemand

Another trade idea I like is shorting the SP Palo spreads, which have enjoyed a recent run-up in price (in sympathy with cash):

000_TradeRank_SPPVdec 000_TradeRank_SPPVnov

Both have gone bid while the forecast for each has slipped a bit.   I’d start shorting both, slowly, and watch cash and the weather.