RD Energy Stay Current Newsletter: June 2024

RD Energy Stay Current Newsletter: June 2024

Key Drivers

  1. Daily U.S. natural gas production cut back
  2. Above average U.S. natural gas storage levels
  3. Technical Trader short-squeeze
  4. Early start to warmer summer
  5. Electric growth from micro chip plants and data centers
  6. 40% jump in LNG export capacity in early 2025

Commentary

The natural gas and electric wholesale markets is ripe for price volatility as the key fundamental drivers of pricing for both commodities is looking both short-term and long-term.  In the short-term we recently exited an extremely warm winter with high natural gas still in storage heading into Spring and daily natural gas production near 106 bcf/day.  We likely experienced the lowest commodity prices of the year in February 2024 that continues a trend of the past several years.  U.S. natural gas producers helped stop the skid in prices by reducing daily production to approximately 97.4 bcf/day in May.  Reducing the daily production resulted in 3 weekly storage report injections coming in below expectations helping to push June NYMEX prices from $1.913/MMBTU on May 1st to $2.842/MMBTU by the end of May 22nd.  Prices weakened as the long weekend of Memorial Day arrived with news that daily production numbers have lifted about 1 bcf/day with the rise in prices.  Coming out of Memorial Day prices dropped back down to near $2.50/MMBTU.  What lies ahead for natural gas prices in the short-term will largely be determined by the cause and effect of daily U.S. production levels, how hot the summer gets meaning how much natural gas is gobbled up for AC electric generation along with the amount of daily LNG exports.  LNG exports has been on the lighter side the past couple of months with a number of LNG terminal maintenance projects.  It appears that as we near the end of May the daily export numbers are rising to around 13.4 bcf/day as the maintenance projects end.

While many buyers like to keep their eyes focused on the short-term it would be wise to keep full attention on the future.  Especially when the number of Micro chip plants and data centers being built will add more power usage on aging power grids in the coming years than at any one time in history.  Couple this demand growth with the natural gas demand growth from the same data centers plus the growth of new LNG export terminals by 40% scheduled for in-service for Q1 2025 and it becomes more clear why year over year pricing for 2025 and beyond shows much higher than 2024 prices.  Compared to the remaining months of 2024, natural gas prices for 2025 are  averaging $.55/MMBTU higher, 2026 is averaging $.98/MMBTU higher and 2027 – 2029 are averaging $1.01/MMBTU higher.  It’s also seen in the electric chart above the year over year price escalation in electric wholesale prices too.  While U.S. producers are likely holding back natural gas suppliers until later in the year when AC demand and then cold weather and expanding LNG exports demand materializes that may help lower the price impact of the added natural gas demand, the same might not be true for wholesale electric prices.  U.S. natural gas prices has always been the key driver of electric prices, but there seems to be a slowly developing price disconnect when looking at the future years of 2026 and beyond.  Too many issues remain to be solved in relation to the massive increase in power usage from all the new data centers and micro chip plants being built and added to an aging transmission line infrastructure.  Plus, PJM has yet to solve the growing issue of how to meet a critical peak event in the coming years as the growth in less critical peak day dependable renewable electric generation assets out pace the much more critical event dependable fossil fuel generation assets. If we get an extremely hot summer throughout the southwest and Midwest and East, electric prices could accelerate faster than expected.

Each buyer should closely review their energy procurement strategy in the face of so many unknowns.  Whether supply contracts end later in 2024, sometime in 2025 or even 2026 the issues especially facing the wholesale electric markets should be closely monitored and price risk tolerances explored.  We’re finding our RD Energy  clients looking at current contract prices versus renewal prices and looking at their energy budgets along with their current energy spends to make decisions on when to buy, what price works for them and how long they can lock in that meets their budget goals.  As a RD Energy client always feel free to contact us if you wish to discuss and explore pricing options for your facility, if we haven’t already reached out to you.  We could be at the precipice when the wholesale electric market could experience unprecedented change and price volatility in the not too distant future.  Thinking about and talking about it now to set price goals and putting a procurement plan in place to protect future energy budgets and energy expenditures is critically important in our opinion.  If you aren’t a current RD Energy client and have no one to talk and plan with or they haven’t been contacting you with market updates and procurement strategies, then please give us a call or send us an email and we’ll be happy to help.

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