Dog Days – Front

Good Morning,

Some call the deepest part of summer, last few weeks of July and early August, the dog days of summer but the market isn’t a dog, there are some exciting movements taking place. A lot of those changes are taking place in the southwest as Palo falls out of favor and the longs look longingly towards the ISO; even the mongrel named MidC is getting some looks and a bit of love. Before delving into the vagaries of Mr. Market, let’s take a quick look at fundies.

Before doing that, let me share with you the method to my blogging madness. On Monday’s I will be posting a fundamental overview of the market and conclude with my thoughts on the front-end of the curve, which I will define as Prompt and in. Though BOM is now BOW, or thereabouts, I’ll still include it this week; next week the Front will be set as Aug & Sep.

On Wednesday’s, I will also do a cursory overview of fundies and then turn my attention to the back of the curve, which will be defined as Prompt+1 and out two years. The Wednesday market thoughts will be almost exclusively “APT” based, while the Front is our GAHBAH strategy (“Get a Hunch, bet a bunch”).

Later this week, or next, I will be adding an MTM update on my trade recs; this will be a simple calc using mids to mark the recs. I’ll also include an aggregated position report since so many of these trade recs offset (rolls, spreads, on/offs, outrights). Still working on those pieces to the puzzle. I’ll be setting up both the MTM and Position Report as automated Email Deliveries, if you’re interested in receiving those on a regular basis, please let me know.

Demand

I’ll cut to the chase, actually, a better way to describe demand is “cut to the crawl.” There is not a lot going on here, at least no extremes, though our summary is the whole WECC is slightly warmer than normal.

Two hubs  (SP & NP) realized net drops in loads, week-on-week, while Palo had a sharp rally out of the monsoon lows and Mid-C just yawned its way into posting a “no change”. Dog days of loads, I guess.

Not hard to see why loads behaved the way they did given the relatively mild temperatures. The ISO interior is still blazingly hot, but the coastal portion of the Sys Op is just normal to perhaps slightly below. Vegas continues to best Phoenix in highs, and the Mid-C load centers are just comfortable; we have yet to see any extreme heat in the Northwest. Is it coming?

No extreme (the high 90s, low 100s) in the load centers but nearly every day of the 15-day outlook is above normal. We’ll label the NW demand outlook as mildly bullish.

Burbank, our proxy for the LA Basin, bounces around normal but on average the outlook is above. Sacto, on the other hand, is well above normal. We were biased the north over the south last week and will carry that sentiment into this week.

Phoenix is a sleeper; temperatures are poised to rally 10-15 degrees and stay around 105 for the BOM. We’d expect that stressed out system to get re-stressed, though nothing like what happened in June. That said, with the rest of the WECC tightening off of declining stream flows and rallying loads, you won’t need 115 degrees to achieve strength. We’ve always believed you need all WECC hubs strong to get break-out prices, and it looks to us  three of the four will have higher “Net Demand” this week than June. Only Palo will lag in that category, but if the rest of the WECC makes up for that hub, we could see some decent cash.

Hydro

We’ve got good news, and we’ve got bad news. Since our glass is always half empty, let’s start with the bad.

This chart has a bit of both. Here we are plotting actual ISO hydro energy for the last fourteen days. Note the higher highs and lower lows, suggesting a general tightening in water as the operators shape more into hour 20 and out of the morning hours. Interesting that the trough is not at peak solar, it has been either hour 8 or 9.

We shared this plot last week and are coming back to it today because it speaks volumes to the volumes of ISO water going through the penstocks. Note that the HL average has not dropped, the ISO is still setting five-year highs in output. Call that bearish with a capital “B.”

The LL, year-on-year, plot has hints of tightening water, the peak output is off a few hundred aMWs, but current hydro energy is nearly 1000 aMW higher than last year and 2000-3000 aMW higher than 2013-15. Call it bearish, too.

Now for the good news, but the good is only for the NW:

The back of the RFC’s 10-day sees 500-900 aMW cuts over last Monday’s STP; though there are a couple of nominal bumps this week. All of which suggests more haircuts in today’s STP (120 day). We’re not surprised; stream flows are weakening in the Northwest.

Coulee averaged 100 kcfs discharge yesterday, which is almost identical to a week ago. But to keep those levels constant they had to pull two feet out of the reservoir – if that isn’t bullish don’t know what is. With load rallying a bit there will only be more pressure on the reservoir, and we expect cuts in outflows.

The Peace discharge rallied, more to support the high exports than serving internal demand (we think). Flows out of Canada and into the USA have come off a bit and are way below normal – and this is a “big” water year. No, it isn’t, the MidC is now staring at a “low” water year for the balance of WY17.

California isn’t low, both the Pit and Cherry Creek are setting records, and every other station we monitor is above normal. Easy to see how the ISO is setting production records, right?

TransGen

MidC gas noms are now at last year’s peak levels further underscoring the tightening of the hub. Palo remains tight, too, and will see a nom rally this week. NP’s gas burn is abysmal, and SP is not that much better. The only reason SP looks high in the above chart is from the awful Q2 noms.

We highlighted the lows flowing on the AC and DC as those either indicate a weak ISO or a tight NW. We’d suggest the former since those lows all occurred on hour 9, corresponding to the low water marks of the ISO’s hydro energy.  BCH swung its NI line hard (2000 MW) yesterday and set a summer high for exports at 2700 MW on HE23. Interesting that they haven’t bought a kwh in the last two weeks and even in the dog hour of summer (HE09) they were still selling. Everyone hates 9, it’s the new 666.

Conclusions

Our new format will be Front on Monday, Back on Wednesday; it is Monday, so let’s take a gander at the front.

 Outrights

The market has battered Palo, and we liked it last week, seems we were wrong, but that only makes us like it more this week:

  • Palo HL – long
  • SP HL – we were short last week, which went sideways but see a general tightening off of loads, so we’ll
    • Buy Back the short and be flat
  • MidC – LL is on a roll, and last week we traded the MidC via the derivs, let’s do the same this week.

Last week we ignored the Aug outrights because there wasn’t a breakout, either way, this week we some patterns developing. Palo is off, SP is rallying hard, and the MidC is just sideways. Let’s go to the derivs to get direction.

OnOff

And here, under the Derivative Microscope, we see some clear patterns developing.

  • Palo Aug on/off has tanked and is now a contract low. How low can it go? We won’t wait to find out as we are going to fade the move off  the coming temperature rallies in Phoenix
    • Buy Aug On Off
  • SP –  on/off is blowing out and setting contract highs in BOM, though it has come off from highs in Aug. Water will tighten at some point in the ISO plus the LA Basin is notorious for late summer heat.
    •  Buy Aug On Off
  • NP is trading about the same as SP, and we aren’t going to double down on the same trade.
  • MidC – interesting how the BOM spread is unchanged while the prompt has puked out and is now a contract low. We’d tend to agree it should be low given the tight water, but is it low because the temperature spread (night vs. day) has been so tight? We think so; if demand rallies it does so in the peak hours, not the off, and so we have no choice but to …
    • Buy Aug On Off

Rolls

Not much of a roll when there is just one week left of BOM, so if we do anything assume it is 4:1, bom: prompt.

Aug-July Rolls

Lots of circles meaning lots of action.

  • Palo – The onpeak has blown out, but PHX gets hot this week, so we’ll
    • Buy the July, sell the Aug HL
  • SP – HL was dirt cheap two weeks ago, now more like fair value
    • HL – liquidate our long position and take profits
    • LL – this is cheap, the LL didn’t follow, and we know water will fall harder in Aug
      • Long Roll (buy Aug, sell BOM)
  • MidC – LL has had the best price action, now the roll is at a contract low, but can water get tighter? Doesn’t matter, if loads rally you’ll get to the same place
    • Buy the LL roll

Sept-Aug Rolls

We see even more action in this roll, the Sept to Aug. Palo has rallied hard and is now value while all three other hubs have tanked. No one likes Sep, or they have ignored that period and bought the Aug. These HL plots are “falling knives” but so what, our virtual VAR is near infinite, and our pain tolerance for phantom MTM is infinite, so we will …

  • Palo HL – sell the roll off of hot BOM and maybe early Aug
  • SP – no position, we’ll do this in NP since we like the odds of tighter water in Sep than Aug
  • NP – buy the roll (buy Sep, sell Aug)
  • MidC – we’d be nervous about buying the roll if Portland had mid-90s, it doesn’t, yet, so we will
    • Buy Sep, Sell Aug HL

Spreads

BOM

Wow, nearly every plot got a circle.

  • SP-Palo; this has blown out off of monsoon cool Phoenix, but the hub is moving back to mid 100s
    • Sell the spread on both HL and LL
  • NP-SP – SP is trading at a premium, and the spread seems cheap, but water is flowing like a Trump  tweetstorm, and this spread is probably priced fairly – no position
  • NP-MC or SP-MC; contract highs at SP-MC in the HL and near lows in the LL. MidC will have the BC big water overhang for the next several weeks, that is an extra 1500 aMW pouring into the hub from the north. Can hydro energy get cut, or can loads rally, more than those BC news? Doubt it, not in the next week, and we know the ISO can soar.
    • HL – long the spread

August

  • Palo has been crushed, but we like where cash is going, so we’ll grasp this “rising” knife and
    • Short the Aug SP-PV spread
  • NP-SP; the LL is a contract low, and we are confident water will tighten, more in NP because there is more MW of capacity
    • Buy the NP LL, sell the SP LL
  • SP-MidC; the HL doesn’t have much of a Forecast-Market delta, the LL does, and we know water continues to get squeezed at MidC, faster than the ISO
    • Sell the spread (LL)