RD Energy’s Stay Current Newsletter: March 2024

RD Energy’s Stay Current Newsletter: March 2024

In lieu of our normal monthly newsletter we thought we would try and help answer two ongoing business consumer energy questions:

  1. Why are energy prices higher than when we last fixed our electric and natural gas contracts a few years ago?
  2. When should business consumers look at renewing their energy contracts?

 

Wholesale natural gas and wholesale electricity are daily traded commodities.  As the #1 fuel source for power generation, wholesale natural gas prices is the key driver of electric prices and the two run in very close parallel.  Obviously, it’s therefore very important the up or down trend of wholesale natural gas prices since those upward or downward trends helps set the direction for both energy commodities.  That’s also why much of what we talk about in our monthly newsletters is about wholesale natural gas trends and the bullish and bearish fundamental and technical factors affecting those price trends up and down.

 

Before we answer either question we recognize three types of energy procurement decision makers – which type are you?  

  1. The energy decision maker is extremely busy, wears multiple job duty hats, knows little about energy and only deals with renewing energy contracts when there is 30-60 days before the current supply contracts end.
  2. The energy decision maker only wants to buy new energy supply contracts when new price offers match or is lower than current supply contract pricing
  3. The energy decision maker realizes their energy knowledge limitations, realizes wholesale energy prices are volatile and are open to listening and reviewing energy market trend analysis and data from energy experts so they are buying at more opportune time.

 

Let’s focus on question 1: Why are energy price offers today higher than they were in 2020 and 2022?

 

It’s often said that that a picture is like a thousand words.  The electric price chart below gives a very clear picture of what wholesale price trends have looked like the past three years.  Wholesale electric and natural gas prices were very low coming out of the COVID-19 energy demand destruction.  In 2022 energy prices soared as energy demand reappeared much quicker than wholesale energy supply.  When looking at the far right portion of the chart the 2024 blue line is reflecting much lower prices than the 2025, 2026, 2027 and 2028 colored price lines.  The extreme slump in 2024 prices is due to the current over-supply of natural gas both domestically and globally as a result of the extremely warm winter.  The chart does help visibly answer the question as to why wholesale energy price offers today are higher than they were before?  When you look at prices on the far left part of the chart compared to the far right part of the chart we think it’s obvious that the answer is because overall prices have shifted up quite a bit.  In 2021 prices for 3 and 4 years were only slightly higher than a 1 or 2 year price making long-term deals very attractive.  As can be seen on the chart, today 12 month price offers are quite a bit lower than 24 month offers and even attractive than 36 or 48 month offers. Why prices in 2025 and the years beyond is do elevated versus 2024 prices is an entirely different topic for a future discussion.  The short answer is that energy traders don’t believe the over-supply issues of today will be present in the future.  Everything boils down to supply and demand.  The longer into the future we look the more confident they are of the belief that supply and demand globally will be much more in balance.

Now let’s look at question 2: When should business consumers look at renewing their energy contracts?

 

Between now and the middle of 2025 a vast number of business consumers of electric and/or natural gas supply agreements coming up for renewal.  The over-supply of natural gas due to the extremely warm in the U.S has driven down 2024 prices to the lowest levels since the COVID-19 shut down.  The big difference between then and now is that energy traders are much more bullish for 2025, 2026 and 2027 natural gas, and therefore, electric prices.  The general feeling it seems in the energy trading market is that once this over-supply of natural gas is dealt with and resolved, natural gas and electric price will start trending up long-term.  Will the prices today for 2025, 2026 and 2027 actually look like bargains later this year or next?  If this turns out to be true, then the next 30 days could be a great time to renew contracts.  If the natural over-supply continues all summer and into next winter, then it would be better to wait to renew contracts.  Consider these current facts:

 

  1. The lowest price of the year was in Q1 the past three years and in seven out of the past 9 years.  This could be the 4th year in a row.
  2. Natural gas prices hit the lowest point in 4 years in late February
  3. The U.S. retail natural gas market is over-supplied versus demand
    1. U.S. storage is 600 bcf above the past 5 year average
    2. Daily U.S. natural gas production is near historical high levels
    3. Winter was the warmest since 1950
  4. U.S. Producers have announced reduced drilling and are slowly beginning to lower daily production to reduce over-supplied market
  5. As daily production goes down natural gas prices will most likely go up
  6. The #1fuel source for power generation is natural gas.  As the hot temperatures of summer arrives the price for natural gas will likely go up
  7. U.S. LNG export capacity will increase by about 40% in Q1 2025 quite possibly beginning to affect natural gas prices the last half of 2024

If you are an energy procurement decision maker who realizes your energy knowledge limitations, realizes wholesale energy prices are volatile and are open to listening and reviewing energy market trend analysis and data from energy experts so you are buying at more opportune time, you probably recognize that buying some part or all of your energy supply for the next 1-3 years in the coming days or weeks is prudent even if your contract isn’t up for renewal until later this year or mid next year.  Finding the perfect and optimum time to renew energy agreements is difficult so buying part now and part later can really help to take advantage if prices do drop more in the future while also protecting against prices rising instead.

If your energy procurement strategy is to only buy when new offers are at or below your current contract prices, then we hope the data provided in our newsletter helps you see that you should likely adjust your belief to “what should be” to “what is reality”.  Only then can you start looking at data, trends and be open to a realistic and less risky energy procurement strategy.

If you’re the energy buyer who is wearing a great number of job duty hats, who waits until a month or two before your energy supply agreements are due to end to renew and who often just uses the same supplier over and over without shopping for a more competitive rate, then it is highly likely that A. you aren’t buying at the optimum time and B. aren’t buying from the lowest price supplier.

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