As we enter 2023 we felt it was a great time to briefly look back at 2022 and note a few key events and price drivers of wholesale natural gas and wholesale electric and then look ahead at happenings and events that could shape energy commodity prices in 2023. Learning from the past can help our vision of the future.
The year 2022 in review
January 2022 started off cold in the west and warm in the east. On January 3rd February natural gas NYMEX was trading at $3.73/MMBTU, but the 30-45 day price forecast was for prices to soften as winter weather neared it’s end. By mid-January NYMEX prices had surged to near $5.00 on colder forecasts, but prices were still expected to soften once the cold weather eased later in the month. NYMEX hit and settled at new price highs in April ($7.267 for May), June ($8.908 for July) and again in August ($9.353 for September), before softening throughout much of the 4th quarter. Price volatility was strong as prices would often fluctuate $.50 – $.80/MMBTU from one day to the next. In early June the Freeport LNG terminal had an explosion and shut down it’s 2 bcf/day export capability. At first it was expected to be off-line 3 weeks and later 3 months. It’s still off today, but could come back on later this month or early February once the final regulatory approvals are received. The effect of keeping over 400 bcf of natural gas in the U.S domestic supply instead of being exported cannot be overstated. How high would U.S prices have gone if the 400 bcf would have been exported? Before the explosion there was talk of $10 – $12/MMBTU natural gas prices. NYMEX did surge again in July and August due to extreme heat in the U.S. creating excessive demand for natural gas in power and AC generation. Plus, due to the war in Ukraine and reduced Russian natural gas exports to Europe, European prices spiked to near $100/MMBTU. Even at $30 – $40/MMBTU U.S producers have economic incentive to export as much LNG as possible rather than sell it in the U.S. at $4.00 – $8.00/MMBTU. Natural gas prices softened in Q4 as AC demand weakened, the arrival of cold weather delayed and the excess natural gas domestic supplies, due in large part to the Freeport LNG plant shut down, filled U.S natural gas natural gas storage late in the injection season wiping out summer long storage deficit prior to winter. While electric and natural gas prices were bad in 2022, without the LNG terminal explosion keeping 400 bcf of natural gas in the U.S. rather than being exported, prices for both could have been a whole lot worse.
The year 2023: What can we expect?
During the last week of December 2022 natural gas NYMEX dropped to it’s lowest price level since early January 2022 as temperature forecasts for late December and the first week of January were for well above normal. While week 2 and 3 of January 2023 isn’t expected to be nearly as warm as week 1, they still are expected to be somewhat above normal. What could change the low price mentality of today and push prices back up in 2023? First, even as we enjoy the warmth after having such extreme cold near Christmas, winter isn’t over. In fact, there are weather models tracking what could be the early signs of a building stratospheric warming event that could lead to another Polar Vortex event near the end of January or early February that could last for an extended period. We’ll be keeping a close eye on this. The cold event around Christmas created a lot of natural gas pipeline constraints and electric grid issues throughout much of the country so, if another Polar event does start to materialize, it’s going to make a lot of utilities and traders very nervous. We also know that eventually the Freeport LNG plant and it’s 2 bcf/day will return to service. Supposedly, the only hold-up now is regulatory approvals and that it could come back on-line later in January after many delays. LNG exports peaked around 13 bcf/day prior to Freeport going off-line. Recently U.S. LNG exports hit 13 bcf/day without Freeport meaning that the new export capability should be near 15 bcf/day with the addition of Freeport’s 2 bcf/day capability. Even though European natural gas prices are currently trading at low levels seen before the Ukraine war, they are still 5 times higher than U.S. prices keeping LNG exports attractive to U.S. producers. Freeport coming back in service is going to remove quite a bit of gas out of our domestic supply and by year’s end could make a real difference on storage levels. We’re concerned the traders are under valuing the impact the Freeport LNG coming back online will have on the supply and demand balance in the U.S. In addition, if the U.S. has another overall hot summer or an extended heatwave, natural gas will be gobbled up in large quantities by power generation likely pushing prices up sharply. It’s common to hear consumers point to lower energy prices coming in 2023 due to a U.S. recession. While that could be true, will the drop in U.S demand be made up elsewhere in the world? Or will demand in China increase after nearly a year long recession first resulting from its zero tolerance COVID-19 policy and now its massive COVID 19 outbreak after lifting the zero tolerance restrictions? China wants to build their industrial might as quick as possible and when it does, it’s energy and LNG consumption could increase exponentially. We also shouldn’t fail to mention that U.S natural gas and oil producers have been enjoying record profits and dividend payments due to high prices. Shareholders demanded that U.S producers get more fiscally responsible and increase their dividends. U.S. producers listened and acted. It’s likely producers will be walking a tight rope to keep production strong and growing while keeping prices and dividends high. A return to their drill baby drill mentality, taking on extreme debt and low natural gas prices, and therefore, lower shareholder dividends doesn’t seem something they or their shareholders want to repeat.
RD Energy Recommendation
Be strategic, informed, nimble and watchful in 2023. Natural gas NYMEX prices in 2022 ranged from a low of $4.024/MMBTU to a high of $9.353/MMBTU. Price volatility for natural gas and electric was extreme. While attractive buying opportunities will exist in 2023, wholesale prices for many consumers coming up for third party electric and natural gas supply contract renewals will find much higher prices than they are accustomed along with extreme price volatility making finding those buying opportunities extremely difficult to recognize. Being strategic (looking beyond the procurement process from the past), informed (understand the market trends and key drivers of prices) , nimble (be able to make a decision and act when opportunity knocks) and watchful (understand that it’s about buying at the right time rather than when your supply contracts has nearly ended) are the foundational building blocks RD Energy use to help our clients buy more timely and more price competitively. We understand that for the majority of buyers price is king. We believe that through the consistent use of our four building blocks along with our strong portfolio of energy suppliers we help our business clients achieve their price goals much more often than they ever could without us. Let us help you make them the building blocks for your energy procurement in 2023.