RD Energy Stay Current Newsletter: February 2024

RD Energy Stay Current Newsletter: February 2024

Key Drivers

  1. U.S. natural gas storage is 5% higher than past 5 year average
  2. Daily U.S. natural gas daily production is very strong at around 104 bcf/day
  3. LNG exports is averaging around 13.5 bcf/day or about 2.5 bcf/day below peak capacity
  4. Speculator NYMEX traders low in number as forecasted arriving cold weather gains confidence
  5. LNG export capacity to increase by about 40% in early 2025

 

Commentary

Since we try to write our commentary based on the latest data, we had to push the release of our February newsletter past Groundhogs Day to include the results  😊.  Looks like an early Spring is forecasted.  As can easily be seen in the electric price chart, wholesale electric prices late in the curve and after 2021 have shifted up quite a bit since 2021.  The other thing to note is the widening in price from 2024 levels in comparison to 2025,2026 and 2027 prices.  When looking at natural gas price curves essentially the same exact thing is occurring.  Why is this happening?  The most likely answer is related to current bearish market fundamentals for natural gas, and therefore electric prices, versus supply and demand conditions in 2025 and beyond.

At the winter half-way point we’re seeing some very bearish conditions keeping natural gas, and therefore, electric prices low: above average levels of storage, near record levels of daily natural gas production and the worst of this winter is likely behind us.  Even if natural gas directed drilling drops , oil prices are high enough that associated natural gas from oil drilling will likely keep the marketplace over supplied in 2024.  As the #1 fuel source for power generation, how hot temperatures get this summer will play an important role in how much surplus natural gas is gobbled up by AC demand.  Any extended heatwave through the southwest, Midwest and northeast could slow natural gas storage injections and slow LNG exports supporting natural gas, and therefore, electric prices.  The growing conflicts in eastern Europe and the Middle East could also play a positive or negative role in wholesale natural gas and power prices depending on the situation.  The point we want to make is regardless of how bearish conditions might look today, we don’t know how domestic or global changes will affect prices tomorrow.

We’re finding many customers are experiencing the price quandary as they look at renewal prices now versus the fixed natural gas and electric prices contracted in 2020 and 2021.  During the COVID 19 years wholesale natural gas and electric prices dropped sharply as energy demand did too.  Business consumers fixing energy rates during this time were able to completely avoid the historical price spike in 2022 as energy demand both domestically and globally returned, but natural gas  production was slow to react and keep pace.  Now those businesses that were able to lock in some of the lowest fixed natural gas and electric prices in history need to start looking at renewal prices, but are finding a wholesale energy market that has shifted upward from those low 2020/2021 price levels.  Even though wholesale energy prices have dipped nicely hitting a low point in mid-December and now again in early February, buyers are still reluctant to pull the trigger while waiting on a wholesale price collapse that will bring prices back to what they were before years ago.  One of the major differences between then and now is that back in 2020/2021 a business could fix a price for up to 5 years at very attractive rates not far apart from each other.  Today we haven’t returned to those low fixed price levels for even one year.  If a business is lucky enough to see prices drop down another level to get close to those previous long-term fixed rates, the same great rate will only be good for one year leaving future years exposed to  much higher wholesale market prices, if nothing is bought past one year, at a time when so much uncertainly exists in the future and we already know that LNG exports are on schedule to increase by around 40% in Q1 2025 adding substantially to the demand for natural gas next year.

We often talk to our clients about buying at the right time.  That never has been truer than it is today.  We’re finding customers exploring a number of fixed price hedging strategies.  Some examples are:

  • Locking in at 100% for shorter terms like 12, 18 or 24 months or some other “sweet spot” in the pricing models
  • Fixing 100% for 12 months and then 25% or 50% for years 2 and 3 years
  • For those with electric renewal dates 6-18 months away we can help them buy 25% or 50% relatively soon on a nice price pullback and later buy more based on market trends higher and lower again being 100% contracted by the time the new contract begins

We at RD Energy then track energy market trends looking for more lower price buying opportunities helping our clients blend in more electric supply over time until they are 100% done buying for another year, two or three years.  Remember, while trying to find the lowest price we’re also trying to protect against upside price risk. We help, advise and facilitate whatever strategy works for each individual client.

We do have some RD Energy educational webinar dates coming up over the next three weeks.  We hope if you would like to better understand the types of data we look at as we help each client formulate and take action on a energy procurement strategy, that you please take the opportunity to sign up for our free webinars.  Energy is something like a foreign language and few speak it well.  We like to periodically offer out opportunities to learn a little more about energy and how we do what we do while helping make energy procurement a little less scary in a volatile ever changing environment.  We look forward to you joining us!

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