Leaning Towards …

Good Morning,

Each morning we put our finger up in the air (index, not middle) to gauge which way the market winds are blowing. Today we lean towards a slight bullish sentimentality, but nothing that inspires devout conviction, more because what isn’t there than what is.

The ISO markets were reasonably bullish over the weekend, within the ISO, and more bearish than bullish outside, especially in the northwest, which realized many ticks well below the DA marks.

Natty opened weakly and recovered as of this post:

So much of the market is driven by that commodity yet its future movements remains mostly random to most of us. Two dominant trends of late, volatility and bullishness, must influence any hedging strategy:

Basis is more up our alleyway, at least that virtual is mostly fundamentally driven, and we see two significant trends developing within. First, the Northwest will lose its luster, soon, and second, the south will rally. Gas noms suggest this:

The Northwest is remarkably bullish; most plants are running, while the south, especially Palo, is setting new lows. That will change and so shall basis which will drive the north down (fixed price) and the south up, but before any of that happens, the weather has to change, and it’s not moving very fast towards summer.

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Demand

Let’s start with loads:

The Northwest is shedding load while the ISO posted a modest rally as did the interior. A deeper dive is warranted:

The WECC interior is drifting up, more off of lows last Sunday than yesterday’s highs.

California also posted week on week gains but recall that last week the state was mired in another biblical storm; now those storms are just faded memories told around the gas-fired campfire in the back of suburban lawns. Though the skies are once again blue, their rivers remain flush with water.

The Northwest is warming up, and its loads are tanking, BPA probably experienced the greatest percentage decline. All of which explains the dismal HA market over the weekend.

But the past is passed, does the future bode differently?

The interior will be cold, colder than normal, for all of this week and even stays below average into next week – gotta call it bullish.

Even the fair state of California sees an HDD rally as they battle the mid-40s. Call it bullish, too.

Then there is the fairest of all lands within the realm called America, the beautiful northwest. We have lost most of our big cold and Seattle is poised to post warm anomalies while the Trump interior continues its miserably cold winter. Net – net, it’s a bearish forecast for the Mid-C because the Clinton West sets the price, not the hillbilly/Trump east.

Just how cold/warm was it yesterday?

Tale of two weeks; Portland / Seattle realized lows that were high, especially relative to two weeks ago; some lows rallied over 30 degrees over the last two weeks; that trend is here to stay.

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Hydro

Demand is just half of the equation, supply-side is the other half, and in the WECC hydro is a good part of the supply side and explains most of that side’s volatility.

Most telling of today’s hydro reports are the draconian cuts in the NWRFC’s water supply outlook. The Dalles has dropped 14% in twenty days, mostly driven by a dry ten-day outlook, one that appears to be poised to change.  The Lower Snake also fell off a cliff, dropping 16% over the same period, during which those Snake River basins were pounded with snow:

Both the Upper and Middle Snake Basins are well above normal; you’d need a few months of zero precip to walk down to the RFC’s numbers, and we aren’t going to see that:

California goes dry, their prayers for “No Rain” were answered.

The Northwest remains dry for the next ten days, but then there are strong hints of a new, and possibly huge, storm system arriving in early February. Those wet days are still in a forecast’s high uncertainty period but worthy of watching. Also worthy of a gander are current streamflows:

Flows out of BC remain unyielding, but the main-stem Columbia shows signs of backing off; BON is down 40kcfs, week on week, GCL is down almost 40 kcfs. California is still working through its largesse; the Sacramento is dumping nearly 30kcfs into the Bay; even the Salt has water. Our side flow indexes are showing signs of life, the Lower Columbia index has almost doubled but the Middle Columbia, the more important of the two, remains at near-record lows.

Most telling in the above is the return of GCL’s shaping capacity; contrast yesterday with a week ago; BPA is back to swinging the plant.

Back to water supply, in a few weeks, the Corps releases its February guidelines for flood control. The TDA outlook is down about 8% from that earlier number which suggests the draft is more modest, perhaps even flirting with precluding drum gate work? Let’s see if history can shed light on the question:

If we assume the current forecast of 87%  holds until Feb 5 (the cut-off date) then we can expect a draft (Apr 30) no deeper than 1258′; note too the 2009 mini-draft to 1267′; drum gate needs a forebay of 1255′ or lower, where things sit today they most likely will not do the work; much will depend on this storm system currently parked in the 11-20 day; will it come to fruition?

It is STP Monday today and always worth looking at the recent 10 Day forecast to see which way the chicken entrails spill out of the carcass. It looks like they are spilling dry and bullish but those numbers don’t reflect the possibility of another storm system. Doubt the RFC places much credence on that clear revival of water, so we are confident that today’s STP comes out bullish to real bullish.

TransGen

The ISO realized a 1000 MW pop in outages; all the nukes are running, and the Mid-C is about to get blown into the Prairies.

Not much has returned, nothing over the weekend, but a nice chunk of hydro capacity has come back online, week on week; apparently to capture some of that rare water flowing passed.

The new outages can be summed up in a word “High Desert”; that beast tripped and pulled 830 MW of low heat rate capacity out of SP15.

One conclusion we draw from these plots is there really can be but one direction for these charts to go … UP. Outages in NP are very small and the Spring season approaches; we expect ISO gas outages to be a real driver of Feb prices.

The Northwest was desperately seeking California buyers yesterday, both the AC and DC settled over the weekly averages. Some of that plethora of exports was made more desperate by BC also selling above its weekly averages. Flows out ZP withered to near zero, settling well below the average.

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Conclusions

Before stating our market thoughts, just a  heads up that Ansergy is extending out its forecast to five years; preliminary numbers are on the site; these are just beta as we adjust our stacks for new gen/retirements/, etc. Our base case will use the most recent WECC assessments. On another aside, we have also begun the work towards implementing the WECC’s topology:

We won’t have quite as many nodes but will be expanding from 7 to 14. More on that in a product update as we get closer.

• Feb
  • We like that temperatures remain below average going into the month, and love the current drying out, and also love the anticipation of large ISO outages (and Palo and NV).
    • 
      • Markets have moved up at all three hubs; we still like south length at the expense of the north, but the market hasn’t agreed
      • 
        • The SPMC has come off about a dollar while the forecast has added a dollar leaving us no choice but:
          • Long the Spread with a new piece
        • SPPV has rallied, we were long the spread, now the forecast and market are at parity and will sell that position
    • On OFF
      • 
        • The market is up everywhere (in the on|off), but Palo and the forecast have rallied there. We see the market is trading the Palo spread at its 90-day lows and will put on a piece
          • Long PV HL, short PV L
• Mar
  • The value here will be determined by Feb’s cash; we are bullish in the south and less so in the north, though our bearishness in the north is diminished by an increasingly likely punting of drum gate to 2018.
  • 
    • No strong convictions from looking at the charts. Our favorite trade is short the SP|PV spread for March
      • 
        • But most of the juice in this has been squeezed by the SP collapse earlier, yet we still feel there is left some love and we’ll short it
          • Long PV, Short SP
• Apr
  • This is going to be the money month, in our opinion. We see WY17 as a strong snow year, it’s not even close to a dry year, and a potential storm is building in days 11-20. Assuming the RFC sticks to its current water supply of 87% at TDA, we doubt there will be drum gate work which merely enhances and expands the runoff into  Apr-June. But, its too early to bet the farm, but might be safe to do so:
    • 
      • The market has soared for Mid-C Q2, way too much given the modest drying, and no draft is only bearish for Q2.
        • Short a piece of Q2 MidC