RD Energy Stay Current Newsletter: November 2023

RD Energy Stay Current Newsletter: November 2023

Key Drivers

  1. Temperatures in the Midwest and Northeast
  2. LNG export growth
  3. U.S. natural gas storage in great shape heading into winter
  4. U.S. natural gas production staying consistently strong

 

Commentary

Wholesale energy prices for natural gas and electric bottomed out mid-February after reaching historical peak levels in the Fall of 2022.  Wholesale prices have since slowly trended up.  Even with the scorching summer in the south and southwest, U.S. natural gas production was able to meet the high power generation demand, fill summer storage to a very safe and stable level as we enter winter and export around 12 bcf/day of LNG.  Although new drilling activity dropped throughout 2023,  U.S. natural gas production has stayed very steady and has kept wholesale prices stable.  While we still see some price peaks and valleys on a daily basis, things have been relatively calm compared to the last half of 2022.  Where do things go from here?

Before looking ahead, let’s take a quick look back.  Prior to mid-2021 wholesale prices were at a completely different and lower level than they are today.  Electric contracts were often being signed at prices below $.05/kwh and under $.50/ccf.  Late In 2022 electric offers moved up to under $.08/kwh and natural gas under $.80/ccf.  Today custom price offers are under $.07/kwh and under $.70/ccf.  So what does the next year look like?  While we don’t have a crystal ball and can’t predict the future what we do know is that as we move into November 2023 we have ample natural gas supplies to keep prices from likely surging too much.  Yes there could be some extreme cold events that causes well freeze offs and pipeline constraints, and therefore, some short term variable price spikes, but overall the concern about long-term prices surges seem to minimal. We also know that we’re now in an El Nino weather pattern that often results in a warmer than normal winter.  Studies have looked back over the past 30+ years to find a variety of conditions present at the time of each El Nino in the past and the weather results each time.  The temperature map we’ve included at the top of our newsletter shows the current forecasted temperature  for the upcoming winter based on the results of the study of past El Ninos.  We all remember how severely cold it was the days before Christmas last year and then how extremely warm January and February turned out to be.  No one forecasted that to happen.  We will have to wait and see what happens this winter both here in the U.S. and in Europe.

November is shaping up to be a little colder than normal.  That is helping keep daily cash prices stable.  We will likely see colder than normal temperatures  in the mid-west and northeast, followed by a few days of warmer than normal and then again followed by some below normal temperatures.  This flip flopping temperature patterns is very common in an El Nino weather patterns.  The western half of the U.S. is forecasted to be very dry and warm this winter and the south and southwest very wet with below average temperatures.  The New England area may experience an above normal number of Nor’easters as the winter storms move through the south, up the East coast and hits colder temperatures in the New England area helping create the above average nor’easter events.

Two more things we should make note of as we look at wholesale energy prices beyond this winter.  First, prices for the winter of 2024/2025 are trading nearly $1.00/MMBTU more than prices are trading for this winter and for the winter of 2025/2026 wholesale prices are trading even higher.  The second thing to note could be a game changer in terms of natural gas, and therefore, electric prices.  Late in 2024 new LNG export terminals are scheduled to come online increasing the U.S. export capability from 15 bcf/day to 20 bcf/day.  The associated question that goes in tandem with that increase in LNG export capability is if U.S. natural gas production can increase over the next year to meet the cold of winter, the heat of summer, domestic manufacturing demand, growing exports to Mexico, summer natural gas storage injections and the 5 bcf additional LNG export demand?  Based on current daily production numbers it’s not possible.  How much of the need for higher production in approximately one year has already been factored into the natural gas prices trading nearly $1.00 higher next winter?  Will we see prices trend up next summer and how dramatically will they rise if U.S. production increases isn’t keeping pace to meet the new higher late 2024 demand expectation?  The big concern for business consumers is locking in lower attractive 12 month fixed rate offers versus higher 24 and 36 month offers. Many are making the assumption that there’s nothing looming in the future that could push prices higher.  Again, we already know that prices are trading nearly $1.00 / MMBTU higher next winter and beyond making longer term offers higher than 12 month offers.  We also have the dramatic increase in LNG export capability looming later in 2024.  Fixing a 12 month price might be ok for now, but by late winter we should be looking closely at fixed price long-term offers and not get caught up in a potential price surge later in 2024.

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