RD Energy Stay Current: February 2022

RD Energy Stay Current: February 2022

Key Drivers

  1. Brutally cold January
  2. Cold hanging on at least through mid-February
  3. Well freeze offs in the south
  4. Strong LNG exports
  5. Rapidly declining natural gas storage levels
  6. Technical short-squeeze + fundamental strength

 

Commentary
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While the majority of businesses have electric and natural gas fixed prices this winter, there are still a lot of large energy consumers buying at least a portion of their energy supplies via a variable rate.  The volatility in pricing the past 6 months has been remarkable.  The volatility broke records in January. On January 27th NYMEX started the day at $4.23/MMBTU and traded as high as $7.346/MMBTU before settling for the day at $6.265/MMBTU.  The natural gas average settlement price this winter is averaging $5.4845/MMBTU or almost exactly double over the same four months last winter.  This winter also includes the warmest December in many years.

Electric prices are soaring as well.  While it’s still fair to hold out hope that prices will come down when the cold weather ends, it strongly feels that wholesale natural gas and electric prices have fundamentally shifted to a much higher level long-term.  Pre-Covid 19 wholesale natural gas prices were consistently well below $3.00/MMBTU.  It’s doubtful prices will even get back down to $3.50/MMBTU this year.  Fixing a long-term natural gas and electric fixed price often was better than the contract before.  Businesses now need to understand that the next contract price for electric and natural gas will be higher than before.  How will your business adapt and incorporate natural gas and electric prices that are 10%. 20% or 30% higher than the previous contract?  What can be done to better manage the higher costs?  Are there ways to lessen the impact of the higher prices?

One month ago there were some bullish price indicators like strong LNG exports and slow to develop producer drilling.  There were also some bearish signals like a very warm December, very comfortable end of winter storage forecasts level of 1520 bcf and a LA Nino helping pull the tropical jet stream north to encompass most of the U.S.  One month later we see the end of the winter storage levels now expected to be 200 bcf lower at 1329 bcf, an unexpected cold air surge from Canada nearly all month long and continuing through at least mid-February, well freeze-offs in the south lowering the available natural gas for consumption and strong LNG exports.  March natural gas is currently trading a few cents shy of $5.00/MMBTU.

As we mentioned earlier, the majority of manufacturers, large and small business, municipal communities and schools have fixed priced natural gas and electric contracts.  However, these contracts will be ending within the next couple of years.  Many will expire inside of the next year.  The question they all need to ask is, “how do we lessen the impact of the much higher wholesale prices.”  We repeatedly say that consumers need to buy at the right time rather than a point in time.  This means that over the course of a year or two the volatile electric and natural gas wholesale commodity markets are going to trade at a very wide price range.  Sometimes they will drop greatly and soon after they will rise sharply.  Who is watching the market trend for you and advising you of the opportunities when price dips occur?  Who is talking with you about and explaining the cost reduction benefit of Peak Load Management?  Or the income program called Demand Response?  If you have no one watching wholesale market price trends, no one explaining ways to lessen the impact of higher wholesale prices and no one offering timely advice, then RD Energy is the energy partner you need.

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