State of the State

Good Morning,

The WECC is in the throes of perhaps the most bullish demand event of CY17, how’s it faring?

By the looks of the ISO clears (DA or HA), the system seems to be quite healthy.  Sure, we see hours spiking above $100 but falling back to the 20s. Demand (actual) says another story:

Peak WECC demand is up 18000 MW, week on week. With prices rising just modestly it seems all is good in the western power markets, from a blackout perspective. The grid is still flush with hydro energy, but that is abating; we see signs that the CA deluge is finally slowing down:

On the surface it appears, there is more water, not less, but note the resumption of intra-day shaping that occurred over the last couple of days. Contrast the most recent week with the previous, and you see a rally in volatility; the operators are cutting off-peak to generate in the on all of which suggests idle reservoir capacity (or declining inflows) and the need to put more water into the super peak (non-solar) hours.

Another valid barometer of health, or lack thereof, is the system’s gas nominations, and those suggest a grid straining to meet demand:

Mid-C noms are Nuts, approaching last year’s highs; Palo’s have blown past previous highs, everything is running in Hades; SP also is strong while NP looks more like a comfortable November day.

So how do things look for next week?

Demand

Before looking forward, let’s examine actual temperatures so we can put the forward-looking ones in perspective:

Warm in the Northwest and California, hot in the deserts, but these are not crazy hot. Crazy would be 100+ in Portland, 100s, Seattle in the 90s. Don’t see it looking back, how about looking ahead?

These look awful for the Northwest; a few days ago we saw more heat, today we see Seattle dipping below average and Portland shedding a dozen degrees. Spokane stays warm, not hot, and there isn’t enough load in the hinterland to drive anything.

We love seeing Burbank post that 104, and it rallied off of Tuesday’s forecast, but alas, these toasty days fall over the weekend. Following these too hot to hit the beach days, there is nothing but blue climo staring at our friends in Kalistan, at least the southern part of that state.  Sacto shows signs of life but doesn’t approach this weekend’s heat.

Then there is the cauldron called Palo Hell:

Hotter than Hades over the weekend, then sliding back to normal for the foreseeable future. Those PV gas noms are going to tank, so will the BOM market price. APS won’t care, they are just letting out an audible sigh of relief I can hear from London.

Hydro

I’ll steal my thunder and say right up front – this fundy is very bullish, take a look at Northwest non-COE flows:

A lot of charts, but note how many are below normal. Normally, below normal isn’t that anormal, but in “big” water year we’d expect above normal flows. There isn’t a project that is above normal; the water year is played out, now any strong load event has to be managed with a declining fuel tank.

Regulated projects are not as interesting, but note the decreasing spill at BON and hard shaping taking place at Coulee – all indicative of declining inflows. Another interesting set of charts are the reservoir plots:

It is July 7, and the projects are still filling, Coulee is 3 feet from functionally full; only Dworshak has drafted, and we suspect that is to keep the lower Snake from boiling. In past years, BPA filled the reservoir by the Fourth. Apparently, that is no longer a hard target. I suspect our fed friends regret all of that GCL spill they deployed in June. Had they filled the reservoir they would be getting a better H/K and have more bullets to spray.

California rivers remain robust, most are above normal, and now the Pit is setting ten-year highs on the super-peak hours. The trends for most are down, but there is still snow in the hills to work through. No instant reprieve for the Golden State.

Before looking at some markets, let’s take a peek at transmission:

What strikes us is the lack of volatility at all three Northwest lines. BC is now hitting all bids, the AC and DC are effectively baseloaded. The Northern Intertie is forward-looking bullish since incrementally they won’t be selling more than the last week, but the AC and DC can’t get any fuller than full meaning declines in load must come out of the gen stack.

Conclusions

It’s hot now, not so much next week, but hydro is declining fast in the northwest, not quite so quickly in the California. Let’s look at the markets:

SP15

Wow, bullish market but the run looks to have taken a pause which makes it ideal timing for a short, especially given strong renewables, weakening demand, and all of that unused gas capacity. Not sure how it ever was driven this high in the first place given the temperate temperatures. How’s prompt look, relative to  BOM?:

 Kind of the mirror image. Pick your poison, either short the BOM or, for those feint of heart, buy the roll. We love fading contract highs/lows and think this is a good time to do exactly that, which is just a re-confirmation of what we recommended earlier in the week.

The Sep-Aug is at a contract low which doesn’t make a lot of sense in a record water year; if anything the back-end of summer should be more bullish as water works its way out of the reservoirs; this plot suggests otherwise. Bear in mind that California usually gets its hottest days (Santa Ana, anyone?) in the backend of summer, not the front.

Palo Marron

That’s Marron, nor moron, and we’ve decided to rename the hub. Verde means green in Spanish – there isn’t anything green within 500 miles of Phoenix unless you count the cash you made being long this beast.

The hub is feeling top-heavy, but the noms suggest it might just break without a temperature reprieve. That is coming, but mostly just normals, though Palo is now on the long climo slide out of summer. We’d be comfortable outright shorting here, but let’s look at the roll:

 Rarely will you see more volatility in the roll (versus the outright) but we do here. It seems all it takes is Phoenix to hit 115 in the 1-6 day to jack the roll 2kbtu, but there are no more days > 110 in store for the desert in today’s forecast. We see more room for the roll to mean-revert and would be comfortable buying the Aug and selling the bom; how about the Sep-Aug:

Shyte, that product is even more intriguing as it is now at contract lows? Why we ask. No one knows what weather is in store for August, let alone September, yet it trades 1kbtu lower than a few weeks ago.

Perhaps the spread between SP and PV is a better play than rolling or outrights?

More contract lows and this looks quite intriguing, assuming you can put it on. Contract lows while the desert gets cooler with each passing day and the ISO’s hydro drops. Put us down for a batch of this one.

Mid-C

We were naked long both the on and off, how’d that fare?

Oooh lah lah, big rallies, big payday. Now we’ll take the profits and take a bom MidC break:

We don’t see either the on or the off absurdly compelling, especially given a cooling trend in the northwest. We still think we’ll see Portland it the 100s this summer, hopefully when Burbank returns to the same. Until then, we’ll let whatever snow is left melt and sip our rum ditty’s on the beach.

Maybe some action in Aug?

Not really, though it is at a contract high if you ignore the Carbon Tax blunder last November. Kind of strange that MidC Aug would be at a contract high in a supposedly big water year. If you don’t like bom than you should short Aug, we will, but have our fingers ready to buy it back with any signs of northwest heat.