Stay Current with RD Energy: How close are we to an energy price crisis?

Stay Current with RD Energy: How close are we to an energy price crisis?

Key Drivers

  1. Short-term (1-2 months) natural gas supply versus demand: Oversupply
  2. 2-6 months: stronger natural gas demand vs lower NG production
  3. LNG: short-term demand weakness vs increases in the coming months with Asian and European demand growth
  4. Warmer than normal July forecasted: high natural gas consumption in electric generation
  5. Natural gas storage: Current levels above 5 year average – likely to drop
  6. U.S. economy energy demand: How fast or how long will it take to recover?

 

Commentary

One definition of “crisis” is any event that is going (or is expected) to lead to an unstable and dangerous situation affecting a group, community or whole society. Another definition says it’s a crossroads or turning point when an important change takes place. The graph from the EIA depicts the possibility that the wholesale natural gas and electric markets are nearing a crisis point. Today’s electric and natural gas procurement decision makers are busier now more than ever as they get their businesses, schools and municipal communities back to operating at full capacity.  It is critically important to keep a close watch on wholesale prices beyond the end of your current electric and natural gas agreement or have a partner like RD Energy that will do that for you and will offer advice and transparency on wholesale market trends and pricing.

Are we nearing a turning point in regards to wholesale prices for natural gas and electric and is it too bold to say when this turning point occurs we will be in a pricing crisis?  Let’s look at some facts.

1. The U.S. has seen massive growth in both natural gas supplies and natural gas demand over the past decade due to both the Shale gas discovery along with the high price of oil. COVID-19 has caused a huge global glut of oil whereupon oil production has been cut back dramatically, which also reduces the natural gas production that is associated with oil production.  It doesn’t take an Economist to know that when the supply of something drops and/or the demand of a product exceeds supply the price for the product will rise.

2. Natural gas in U.S. storage is running about 17% above the 5 year average. With the heat wave now being experienced in the Midwest and northeast for at least the first half of July, if not longer, natural gas will be consumed at extreme quantities in the production of electric as the number one fuel for generation. The expectation is that storage injections will drop substantially over the next 4 weeks lowering the surplus versus the 5 year average as natural gas demand rises and supplies drop.

There are so many bull and bearish signals in this strange and uncertain time that it is nearly impossible to know for sure where the market will be in the short and long-term.  However, there are strong signals and indicators.  Pricing in the energy wholesale markets have been weak in the short-term as natural gas supply has exceeded demand.  COVID-19 greatly reduced oil demand creating the need to reduce oil production and associated natural gas production.  Longer-term prices for natural gas are much stronger as demand strengthens and supply drops.  As an example, in January and February 2020 natural gas NYMEX closed at $2.158/MMBTU and $1.877/MMBTU respectively.  January and February 2021 is currently trading at 2.932/MMBTU and $2.899/MMBTU.  Forecasts reflect a price expectation for January 2021 to be around $3.20/MMBTU by the end of the year.  This type of price increase from one year to the next is substantial for consumers and will be felt.

As we have said repeatedly in our newsletters throughout the years natural gas is the primary driver for electric prices.  We’ve heard it stated that there’s about an 85% correlation between what natural gas prices are versus electric price trends.  Another important factor for electric prices is PJM Capacity costs.  PJM capacity rates will be taking a very sizeable jump beginning June 2021.  For the June 2019 – May 2020 PJM year the PJM Capacity rate was $35,322/MW.  For the June 2020 – May 2021 PJM capacity year the rate is lower at $27,933/MW.  However, for the June 2021 – May 2022 PJM capacity year is jumps to $51,100/MW.  Since PJM capacity costs makes up about 25% – 30% of the total all-in price, having the PJM capacity cost nearly double will definitely have a negative effect on customer fixe rates.  PJM capacity rates for the years 2022/2023 and beyond are not yet known.  Usually PJM would have already announced capacity rates for another year or two by now, but there have been ongoing discussions between PJM and the Federal Energy Regulatory Commission (FERC) about the capacity rate structure in the future.  It’s unknown what bearing the end results will have on capacity rates customers will be charged.

At RD Energy we work hard to inform and educate clients so they have a strong natural gas and electric procurement strategy.  We want to help them shop and receive the lowest price, but we also want to help them reduce their price risk by making informed decisions.  If it’s possible to avoid the price risk of a rising market, we like to help clients get ahead of upward trends to lessen the  bottom line impact.  We know locking in a year over year cost savings is always preferred.  However, avoiding higher costs is often just as important by taking some price risk off the table.  As many of you know we also help many clients take part in one or both Peak Load Management and Demand Response programs to help lower their electric costs even more by shaving PJM capacity costs and actually receiving an annual income for helping make the PJM grid more efficient.  If the EIA chart is correct and wholesale commodity prices are near a turning point or crisis point, then we should look to do whatever we can to lock in a price savings, reduce upward trending price risk, shave capacity costs and when possible earn an annual Demand Response income via transmission grid operator PJM.  Always feel free to contact us at RD Energy to discuss your electric and natural gas contracts as well as if Peak Load Management and Demand Response are good options for your business.

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