Key Drivers

1. Extreme heat in the southwest – revised forecasts for Midwest lowering the temperature
2. New natural gas drilling activity reduced by U.S. producers throughout 2023
3. The large natural gas storage surplus from spring reduced substantially throughout summer
4. LNG global issues: U.S. exports expected to jump up soon; Australia’s LNG labor strike

Commentary 

U.S natural gas producers want higher well-head prices and are reducing drilling activity to try to achieve it.  Natural gas drilling activity started slowing at the beginning of 2023 and the active drilling rig count has dropped substantially since April.  Since the end of April the active natural gas directed rig count has dropped by 46 or the lowest number of active rigs since December 2021.  Natural gas storage in the U.S. exited winter with a large year over year surplus due to the abnormally warm January and February.  The surplus has shrunk throughout the summer as the extreme heat in the south and southwest gobbled up natural gas in massive amounts as the #1 fuel source for power generation.  It’s believed that the extremely high amount of natural gas consumed in power generation this summer has also kept LNG exports to around 12 bcf/day most of the spring and summer.  When the extreme heat in the south and southwest does finally break it’s expected the LNG daily export number will jump 2-3 bcf/day as Europe prepares for winter.  If LNG workers in Australia go on strike September 7^th after rejecting Chevron’s latest pay deal this past week, this will put the global LNG market in turmoil and could affect prices in Europe and in the U.S.  While there are quite a few bullish wholesale price fundamental factors existing for natural gas, and therefore, electric prices, the temperatures this fall and winter in the U.S. and Europe will help give final key direction for natural gas prices in 2024 and beyond.  The worst case scenario is that the Midwest and Northeast will have an early start to cooler temperatures this Fall along with a normal or cold winter.  Couple this with the slowing down of natural gas drilling activity throughout 2023 and natural gas and electric prices could escalate quickly.  We seldom see the worst case scenario, but now that natural gas and electric prices are affected by both domestic and global events and weather extremes, it can’t be ignored. Some new long-range weather models are pointing to below normal temperatures in the Midwest and northeast by mid-September carrying through October.  The weather map at the top of our newsletter shows a very early weather model resulting from the current El Nino weather pattern that exists:  a very warm and dry northwest, a very wet and stormy south leading to storms heading up the East Coast ending in a number of  Nor-Easters and a Midwest that will see periods of cold flipping to periods of warmth.

Closely monitoring fundamental and technical price trends and energy market data has never been more important.  Trying to buy strategically has never been more important either as prices get more volatile and price swings on any news that hits the data feeds.  By slowing new natural gas drilling activity throughout 2023, the effects of which show up 6-9 months later, the U.S. consumer is being put at some serious price volatility risk.  On the electric side of the equation there are some issues as well that could and will likely eventually effect consumers.  The electric transmission grid is concerned about upcoming coal, old natural gas and nuclear power plant retirements lowering the amount of fossil fuel and nuclear power generation sources and how to balance forecasted power demand with renewable resources being counted on to replace the retired plants.  PJM and FERC continue to debate how to price capacity to help fix the deliverability issues PJM foresees in the near future on the current path FERC is pushing them towards.  Capacity charges on PJM that that can make up 25 -30% of a consumers supply price is extremely low today, but could jump pretty dramatically if PJM convinces FERC something needs done to stimulate new fossil fuel growth to replace some of the upcoming power plants retirements and lower the risk of rolling blackouts in extreme weather events.  Capacity prices are normally determined by PJM auctions three year in advance of flow.  Today we only know capacity rates through May 2025 as PJM delays holding capacity rate auctions as the discussions with FERC continues.