Good Morning,
It’s summer, and that means it is about loads, at least it’s about loads when all the nukes are running, and the ISO is reporting near-record low gas outages. We can all agree there is a positive correlation between change in cash and change in term marks, so predict what cash will do and term most likely will follow. Not much changed since Monday, except the weather.
Both Palo and Nevada are seeing cooler temperature forecasts, though each has hints of warming up again, but not until next week. These aren’t 80s in Phoenix, but they aren’t 110s, either. Our weather takeaway for the WECC interior is bearish.
First note that Burbank realizes a bump in climo, the only station in the WECC that gets warmer this late in the year. The LA basin will be slightly above normal over the ten day while NP will be a few more degrees warmer than normal. The anomalous heat in the north also extends out a few days longer than does the south. These forecasts are net bullish and would slant our biased towards length for the ISO, more so for NP than SP.
The Northwest, like California, is mostly above normal for the next ten days. Given that the region has become the hub de jour, at least regarding heat rate, we would fear shorts here. Let’s take a closer look at how spot has traded:
In both the On and Off, the MidC has cleared with the highest heat rate over the last couple of days. This is taking place without many degree days and with BC selling hard. Let’s look at the values:
The MidC cleared at a 16k heat rate on Monday and a 13.4 yesterday, while the ISO was in the mid 12s and Palo has fallen back to earth with its 11s. Looking ahead, we don’t see the MidC backing off anytime soon, not with water getting cut (see STP) and the hub posting a string of above average temperature days.
This set of plots compares daily spot heat rates over the last couple of years. Aside from the freak show a few weeks back, the hubs are trading near the previous highs which are remarkable given that the temperatures are not that hot. Let’s go to the noms …
PV, SP, and NP are both mid-range for a summer day, but the MidC is just about out of “gas”. Remarkable given it isn’t hot, and we supposedly are amidst a “big” water year.
Conclusions
What to do? Before drawing those conclusions, let’s see what a jumble of positions APT put on last week:
The book is net long, but much of that is off of BOM length, and July is done. Our fundamental takeaway is very bullish in the north and just bullish in the south, the book doesn’t reflect that. Let’s go to the Front curves and see how best to remedy that discrepancy.
Nothing is cheap, but we want a long bias in Aug, so we will:
- MidC HL – buy two pieces to offset the current short
- Palo – we’d rather have length in the ISO, but PV is still the relatively cheapest spot for length, so will hang on to that length.
- NP15 – we ended up with a short in August through a lot of derivs, we’re going to buy that back and go net long 50 MW.
- Some of our bullish sentiment is driven by a slight walk down in ISO hydro energy
- yesterday’s peak was the lowest in 14 days and the number of hours where energy was cut was the greatest in the last 14 days. We expect this trend to continue.
- Some of our bullish sentiment is driven by a slight walk down in ISO hydro energy
- SP15 – we’re flat there and will stay that way.
Term
This table summarizes all APT trades with a “Strong” recommendation. Bear in mind, APT is a fade strategy, and with bullish front-end fundamentals, any net shorts have some risk. That suggests we should be looking for cheap outright length:
The top HL outright is the Q4 18 MidC:
It’s range-bound, has been for the last three months. How’s the 17 look:
The near-term Q4 has rallied rendering it less attractive for length, but with strong cash, it should rebound more, plus we expect the Oct-Nov STP to be backed down sometime soon. Given that, we will:
Buy Q4 17 MidC HL
We will leave the rest of the trades as is; APT typically takes 2-3 weeks before it starts showing some love.