RD Energy Stay Current Newsletter: May 2024 Short-Term Vs Long-Term View

RD Energy Stay Current Newsletter: May 2024 Short-Term Vs Long-Term View

Key Drivers

  1. Natural Gas storage is 655 bcf higher than the past 5 year average
  2. U.S. natural gas producers have reduced supplies to retail market to slow the slide in well-head prices
  3. Approaching AC season and forecasted hotter than normal summer likely to bolster prices of NG and electric
  4. Future NG and electric growth forecasted as new LNG export terminals near completion and exponential data center and microchip usage looms in future

Commentary

Natural gas NYMEX prices for March, April and May closed at $1.615/MMBTU, $1.575/MMBTU and $1.614/MMBTU respectively with daily cash prices even lower most days reflecting the current glut of natural gas as the U.S. exits an extremely warm winter.  The U.S.’s natural gas storage is now 655 bcf higher than the last 5 year average at this time.  Natural gas producers in the U.S. are working to ease the current over supply situation by reducing supplies to the market upwards to 5-6 bcf/day to keep prices from sliding even more.  Couple the mild end of winter and mild spring with the loss of natural gas demand from one of the largest U.S. LNG export terminals due to operational and maintenance issues and current demand is very weak. U.S. producers and energy commodity traders are looking for a hot summer and high natural gas usage in AC generation demand to increase natural gas demand greatly and push up prices.  It appears that the LNG terminal that has been off-line is starting up well this week adding to the changing demand picture.

In the chart above we thought it would be interesting to also see a technical trader view of things since they play a very important role in energy commodity price direction too.  Although we closely watch and track fundamental factors effecting prices, keeping an eye on the technical chart view of things helps bring focus as “long” and “short” commodity speculative buying and selling positions in large quantities can push prices higher and lower to extremes outside of what might happen based on fundamental factors alone.  We’ve added the red arrows to help show the 5 Wave structure in the current technical bear or lower price pattern direction since late 2022.  If they are correct, we’re in the late stages of Wave 4 where if it worked perfectly prices would rise into the technical Resistance bank of prices before falling to a new low point in Wave 5.  The point they are making is that with the completion of Wave 5 the trend should then reverse and the upward trend will begin and could last over a series of months or even years.  What we find interesting is the link between fundamental and technical trading, although both sets of fundamental and technical traders mostly say they don’t watch the other too much.  One important takeaway is that the technical model never happens as exactly expected.  In our opinion fundamental occurrences change the technical factors more than anyone wants to let on.  If U.S. producers hadn’t substantially reduced volumes into the retail market, would prices have fallen sharply as part of Wave 5 already thus proving the technical Wave 5 pattern correct?  Will Wave 5 fall like expected now that the supply and demand is coming more in balance with production cuts and  AC season possibly arriving quicker than normal?  Watching the technical charts is interesting and helpful, but watching both technical and fundamental data points is an important balance.

Future power prices are up far beyond daily cash prices and 2024 prices and no one really knows why. We’ve seen electricity prices significantly move higher since bottoming out in mid-February while natural gas fundamentals remain bearish following the warmest winter in decades. Longer-term natural gas prices have been increasing to a modest degree, but not to the same magnitude at which power prices have increased.   What was once, “follow gas prices, follow power prices” has started to shift a little as the two commodities have started to decouple (i.e. heat rates are expanding). This decoupling and higher electric price trending doesn’t point to one specific answer, rather a number of different working theories that may be contributing to the run-up in prices.  Although there are numerous reasons, two of the most impactful are likely:

  • Burgeoning data center/A.I. load growth assumptions, especially in PJM, while faced with…
    • Scheduled coal retirements and a slow pace of new resource builds coupled with…
    • Lengthy interconnection queues and significant transmission upgrade requirements
  • Continued risks for grid instability during unexpected/weather events.  Peak electric deliverability on the hottest and coldest hours of the grid comes into question as less reliable renewable generation sources increase and more dependable fossil fuel power generation assets retire.

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