Key Drivers
- A few weeks of below normal temperatures in the Midwest and Northeast in April
- Strong LNG exports to Europe and Asia
- Weak daily domestic demand
- Above average natural gas storage levels
- Summer AC season not too far away
- Slowing down of new U.S. natural gas drilling programs
Commentary
The one big item at the front of many energy conversations is the extreme high cost of utility electric generation rates in Ohio beginning with June 2023 electric bills. The good news is that none of our RD Energy customers need to worry about the high utility generation rates. It’s surprising though how many businesses are still buying utility generation, and therefore, about to see a rate increase that will jump their annual electric bills by thousands and thousands of dollars.
What concerns do RD Energy customers need to have in regards to electric and natural gas prices? The chief concern will be seeing their annual costs increase at renewal time since the forward curve price trendline when looking at prices for the years 2024, 2025, 2026 and 2027 is higher year over year than electric and natural gas prices found in the years 2020 and 2021. Unless we see a major shift down in wholesale future prices, energy budget costs will eventually need to be increased. The other big questions are; What is causing higher prices when looking at pricing in the years 2024, 2025 and beyond? How do you protect your company and lower the impact of higher prices?
When we look back to August, September and October 2022 natural gas and electric prices were peaking: a one year price for either electric or natural gas was higher than a two year price and both were higher than the three year price. When natural gas and electric prices plummeted in January and February 2023, due to some of the warmest weather in decades in the Midwest and Northeast occurring, the near 12 months fell the hardest and the wholesale prices year over year completely flipped. A one year price is now lower than a two year price and both are lower than a three year price or the opposite of what has been historically the norm.
We’re now moving into May 2023, but we aren’t seeing wholesale natural gas and electric prices in the years 2024, 2025, 2026 and beyond falling back into what was the “normal” for many years prior to the January/February price plunge. The best word to describe why prices in the future years are much higher than the near term is FEAR. Fear that U.S. natural gas producers can’t add enough new drilling and production to make up for both normal yearly production declines from existing wells as well as growing domestic and global demand. LNG exports will continue to rise in the years 2024, 2025 and beyond as new export facilities are being built now and more to be built. The U.S. has the capability to ship up to 16 bcf/day now to Europe and Asia, but within 5 years it could be shipping 30 bcf/day.
On the electric side of the equation the fear is that as fossil fuel electric generation sources like coal and natural gas plants are retired the oftentimes renewable wind and solar generation assets replacing them don’t have the generation consistency that the fossil fuel generation plants have. It’s harder for electric transmission grid companies like PJM to meet it’s winter and summer peak demand with generation assets that don’t have the production consistency that the fossil fuel plants have. This fear is actually causing electric prices in the year 2024, 2025 and 2026 to grow faster than we’re seeing in natural gas prices. While natural gas prices have been the key driver of electric prices in the past and still are to a great extent, we are seeing a level of disconnect not seen before. Sometimes we have a client asking, “why are my natural gas offers going down with wholesale prices, but my electric offers are going up?” It is all stemming from the new disconnect.
To circle back we still need to try and answer the earlier question, “how do you protect your company and lower the impact of higher electric and natural gas prices?” Similar to the common phrase often said about how to be a good parent, “the most important and easiest part is just showing up”, we believe the same can be true for your energy partner. That’s why we try and show up with our monthly newsletters, market trend analysis, data collection and daily communication with clients. We want our clients to know without a doubt we will “show up” when they have questions or concerns. We believe our customers need to be knowledgeable, aware of energy market trends, tools and pricing strategies at least at some minimal level. The year 2022 and 2023 to date has shown us just how volatile energy prices can be. What happened in 2022 was not necessarily a one and done event. We could easily see that happen again if not this year, then in 2024 or 2025. Let’s keep looking at the data. Let’s keep talking. Let’s keep buying strategically.