Fireworks

The Fourth is always a good demarcation between runoff driven market prices and the rest of summer. The rest of summer’s prices are set by loads, usually, but not this year, not just yet. California remains a hydro-generating machine as evidenced by these two plots of actual energy:

On peak energy (average across the 16 hours)  is just 300 aMW higher this year than last, but 1000-2000 higher than any of the previous three years. Light load is more dramatic than HL:

This year is 1000 aMW greater than last, and 2000-3000 higher than the past three years. More hydro energy combined with new wind and solar capacity bodes poorly for price volatility (upwards, that is) and there is little relief in sight, though both HL and LL appear to have crested and SWE is at zero at several stations.

Just two of the stations have material amounts of snow and after the last heat wave, a big chunk melted away. But, with reservoirs full and snow still in the Sierras, hydro energy will not collapse this week and the current anomalies (against the last four years) will remain through most of this month.

The Northwest is showing signs of a return to normal, even hints of below normal, take the Sideflow indexes as a case in point:

All four are at, or below, normal. SWE confirms this is as it should be:

More snow on the ground as of July 2 than last year, but this water year is dwarfed by levels from the previous four big years. Discharge is supporting those levels, flows at GCL and BON are falling hard:

Coulee has seen average daily generation flows drop 60,000 cfs in the last two weeks. More telling is the dramatic shaping taking place – water in the offpeak has been cut to 70 kcfs, all indicative of tightening in the MidC

The last dam on the Columbia, BON, has also seen generation discharge drop and so has the spill. The project is now spilling per the Fish Operating Plan versus the “Price” Operating Plan which has been driving spill levels for the last four months.

It’s July now, and the only thing which will drive prices is loads, and we see signs of stronger demand this week.

That cauldron known as Palo will continue to bake, but nothing like it did a week ago and now the 10-20 day forecasts are pointing towards cool anomalies, something the hub hasn’t enjoyed for almost a month. Equally telling is the hub’s gas noms:

Despite posting ten-degree anomalies, the hub’s gas noms are off about 35% from last week’s peak. Those gas noms imply ample reserves to meet this week’s heat. Those projected cool anomalies are of especial concern for unhedged length since we don’t expect any dramatic cash surprises this week. Fundamentally, PV is looking weak and this week may be your last shot at exiting your length and keeping your positive mtm.

 

California, on the other hand, is growing hotter and might even be considered “hot.” All cities are well above normal for the next ten days (getting passed the next two, that is). However, that 2000 aMW hydro-overhang will rain on any irrational exuberance. Beyond the ten days, like Palo, brings only pain.

 

Then there is the Northwest where we will see modest heat in Portland, not extreme heat, but enough CDDs to drive loads up 2000-3000 MW. Couple the demand side bullishness with an ever-tightening water outlook and you have a recipe for a MidC recovery. It needs one, check out the hub’s historical noms:

Even with a recent recovery the hub still lags three of the last four years. In other words, there is a lot of room for MidC to run and we think we see it start jogging later this week.

The incremental transmission outlook is bullish with lines full southbound (AC and DC) and the Canadians selling hard. Any new internal net demand can only be served by Northwest gas, though if things get ugly tight (probably won’t), they can always back off flows to CA. We’ve always said you need all the hubs in the game to stress the system, this week won’t break the system but will be a modest test.

Conclusions

We see a tightening of markets across the WECC this week (after the holiday) and typically want to look like cash, but the cool-down in days 10 to 20 are a concern. That said, the market will stay strong as long as cash is so we’d be biased towards length in the front.

Mid-C

  • BOM

    • we like seeing BPA start shaping again, we like seeing SWE disappear, and we want to see Portland post a string of 100s (but probably won’t) and don’t like seeing the market rally, which is what it has done:
      • Not a lot, but it’s up, though we think there is more room to run off of tightening cash
        • HL  – long
      • The LL has run, too, but we see more room to run:
          • Water is LL’s friend now, with BPA shaping like the good old days, even when there isn’t much load, we see targets in the low 20s for cash LL.
            • LONG HL & LL
      • August – If you like cash its hard not to like the prompt and we see water getting ever tighter that said the market has bid up the Midc Aug heat rate 1000 btus:
        • We’d love to jump on the bandwagon but think the bom is the better buy since the roll has dropped recently:
      • Hate hedging out what we believe is a good bom trade, but convictions are such that we’d …
        • Sell the roll (short Aug, long bom)

SP15

Water is healthy, so are all the other renewables, but loads are going to rally, and the overall WECC outlook is tighter; that said, we like buying cheap and selling rich and the aug-july roll is at a contract low:

Bear in mind, those Burbank temps don’t hit 100, and hydro energy is still 2000 aMW higher than any of the last four years. We also are watching the 10-20 day, if those cold anomalies come to fruition the bom is toast and given contract high heat rates for July SP it is just too much to ask us to go irrationally exuberant over bom sp:

Crazy, huh? Not that the aug is cheap, it’s not:

Seems the safe play, given outright MidC length, is to sell the spread and the roll:

Buy Aug, sell July HL

Palo Verde

Nothing is weak here, except the 10 to 20-day outlook. With a tight ISO and tightening Northwest, we expect Palo to be safe from a long position, but we’d be inclined to be early sellers of BOM since there is such a long ways for this hub to fall. The bom is trading at a stupid heat rate, especially given that current noms are only at about 65% of gas capacity:

Most likely cash will pay you for a few days, then should those cool anomalies become a reality, all length will get smoked. Aug is cheaper, but normal loads are much lower later in the summer:

We advocated selling the bom: prompt roll last week and got paid a buck, but there may be more juice in shorting that roll:

Instead, we’ll just liquidate and take gains, and our focus will be on the ISO and MidC for the remainder of the week.

 

ADMIN NOTE: Mike returns from holiday next week. We have some exciting things we’ll rolling out this summer and leading that list are Alerts. More on that later.