RD Energy Newsletter: April 2020

RD Energy Newsletter: April 2020

Key Drivers

  1. Extremely high U.S. natural gas storage levels
  2. The Russia-Saudi war over oil production market share
  3. COVID-19:  Rapidly plunging global energy demand
  4. Rapidly reduced oil & natural gas production budgets

 

Commentary

The winter that wasn’t.  The winter of 2019/2020 will likely end up as one of the warmest on record.  Last Thursday the EIA Natural Gas Storage Report showed U.S. natural gas levels in storage 80% above 1 year ago and 17% above the 5 year average.  Of course things have only gotten worse for short-term natural gas demand.  Coupled with an extremely warm March in the Midwest, we have also seen the further reduction loss of natural gas demand as businesses across the country have been shut down.  Current month cash prices have gotten crushed.  After all that, we have to weigh in the effects of the Russia-Saudi war on oil market share and the rapid drop in oil prices from $70+/barrel to near $20+/barrel levels.  With break-even costs for some major formations of around $40/barrel, new drilling plans for the rest of 2020 have mostly been scrapped because investors have held up a big ‘STOP‘ sign for new investments. Producers have suddenly been starved for cash so current production of oil and gas hasn’t dropped much….yet.  Production will have to drop before long as demand continues to drop world-wide.

One bullish factor that many hold out for is an early arrival of natural gas fueled electric generation A/C load.  A hot summer would help the supply situation a lot, but consumer demand coming back sooner than later is critically important.  While the next few months of natural gas NYMEX futures prices are trading at historically low levels, prices for next winter and beyond have not experienced much of a drop.  Actually, they have remained very flat or up just a little.  We have seen consumers looking at the front months and thinking that long-term prices must be down substantially too, but it’s not the case.  The truth is we are seeing greatly discounted natural gas prices compared to contracts signed just a year or more ago but customers have the mental roadblock that it should be more.  While saving $.30 – $.50/MMBTU or per MCF is attractive, many consumers believe by looking at April and May’s abnormally low NYMEX prices that long-term fixed rates should be even lower.  We could see April and May prices stay stable or rise since the summer to next winter storage price spread is so attractive to natural gas storage holders.  With the strong natural gas productions numbers continuing for now, storage buyers will likely take advantage of the April – Winter price spread and inject large natural gas supplies into storage this Spring.

Electric consumers are also expecting long-term pricing to be much lower than they are being quoted.  Although prices are attractive and most often much lower than current contract prices, many are holding out for a total price collapse to buy long-term.  However, there are many other price factors in play.  Besides all the supply fundamental points discussed earlier in relation to natural gas, PJM Capacity costs long-term is affecting prices too.  Electric consumers behind PJM are currently in the middle of a low priced Capacity cost which makes up approximately 30% of an all-in electric price to the consumer.  Beginning June 2021 the PJM capacity cost jumps nearly double.  Even with the much higher capacity component wholesale  prices are helping keep contracted prices looking low.  But many consumers think they should be lower without understanding the Capacity cost component.

The electric and natural gas wholesale markets are very confusing with many moving parts.  How do business consumers find the best path for finding the best prices, best strategies and best programs for their company’s budgets now, a year from now and two years from now?  We believe RD Energy is the energy partner to help each business create a strategy that meets their company’s goals and sustainability mission statements.  Please contact us with questions or to set up a online meeting.

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