Shipley Energy

Market Update August 2021

Our Shipley Energy Commercial Solutions Team is excited to share with you a monthly update to keep you informed on trends, weather, and other factors impacting the market. Continue reading for key energy market updates!

Electricity

July continued the trend of rising electricity pricing that is now basically the story of the entire 18-month pandemic so far. The forward PJM 12-month curve increased nearly 6% from 3.57 to 3.78 cents /kWh, after peaking around 3.95. This means a one-year contract for electricity with an immediate start now costs about 2/10ths of a cent more than it did in early July. As natural gas continues to hover around the $4 range amid increased overseas demand and more extreme weather patterns, electricity shows us numbers we haven’t seen in years. It was only in March of 2020 – that now-infamous month – that the 12-month forward curve was only 2.40 cents. Is it any wonder why customers are seeing increases of a penny or more in their renewal rates?

Customers renewing in 2021 or early 2022 would do well to expect a 15-20% increase from your last price – so if you’re used to paying 5 cents, you may be faced with 6 cents. Customers with moderate risk tolerance and a little bit of time may do well to wait this out, but there are no guarantees that a refresh in 2-3 months won’t be decidedly higher. Remember, there are almost no legitimate bearish factors to speak of right now. Customers with high risk tolerance may want to look at only partial hedges, or even enter into this upcoming winter on an index price with the idea that hourly pricing won’t be as high as the inflated market is betting with forward January and February 2022 pricing.

Once again, customers with a very low-risk tolerance likely don’t have the stomach or bandwidth for those options and should hedge through November 2022 as soon as possible.

Key Points

  • Customers using more than 1 million kWh often have two tools to mitigate the increase:
    • Capacity & Transmission Pass-Thru Prices strip out the demand component from a customer’s per-kWh price and instead pass them through each month at cost. Learn more about Capacity & Transmission Pass-Thru Prices.
    • Peak Shaving is a way customers can time their usage so they avoid paying up to 40% of their price by reducing Capacity and Transmission costs.  Learn more about Peak Shaving.
  • Even with the increase of the last month and beyond, many long-term customers are still looking at their third-lowest price since deregulation. There had to be a bottom, and it seems like we saw it in 2019 and early 2020. We are happy to provide a price history for comparison upon request.
  • Customers using less than 300,000 kWh annually may have an attractive utility option to move to for the time being. That price is only known for three months at a time, but your Shipley Energy consultant can help you take advantage of the below-cost utility prices for a short time while we look for better long-term options.

Guidance

In an up market like this it’s all about risk tolerance. If playing the energy market is not your business, get locked in through November 2022.

Natural Gas

The August 2021 natural gas NYMEX contract expired at $4.044. This continues the trend of significant increases in settlement price month over month following the June expiration at $2.984 and the July expiration at $3.617.  The August NYMEX expiration is the highest NYMEX expiration price for any month since December 2018 ($4.715). The continued heatwave driving temperatures towards 100 degrees for parts of the country has sustained the high demand for natural gas to fuel electricity generation. A key factor that traders are keeping an eye out for is the potential for electric generators to opt for coal-fired methods of electricity generation if the pricing of natural gas continues to climb. Lower demand for natural gas for power generation would free up more available gas to be injected into storage for winter and would likely prompt a drop in natural gas NYMEX pricing. Another factor to watch are the current levels of European natural gas storage. NG winter storage levels in Europe are trailing significantly behind 5-year average levels, prompting some early concern that there will not be enough gas in storage to meet winter demand. Should the storage levels continue to trail the historic average entering winter there is the potential for NYMEX price spikes if the U.S. increases LNG (liquified natural gas) exports to Europe.

Key Points

  • The amount of natural gas in U.S. underground storage for winter continues to trail slightly behind the 5-year average level for this time of year. (Current Level: 2,776 Bcf vs. 5-year Average Level: 2,954 Bcf)
  • According to the National Oceanic and Atmospheric Administration (NOAA), July 2021 saw the hottest average global surface temperatures ever recorded since record-keeping began in 1880.

Guidance

With natural gas NYMEX prices reaching upper levels not seen in several years, our pricing desk advice for customers approaching renewal is to continue to reach out to your Account Manager for weekly price updates for opportunities to lock in prices during potential dips in the natural gas market.

Petroleum

July typically marks the seasonal peak in fuel demand as gasoline demand begins to wane from August into September as passenger travel slows.  August 2019 was the exception, as it was the highest gasoline demand measurement of all time (9.8M barrels per day).  With seasonal demand models upended during a time of COVID-19, transportation fuel demand continues to rise as futures have peaked in mid-July, with propane being the exception as its price has been unphased due to strong export demand pulling barrels from the US.

Crude oil highs peaked on 7/5 rallying 37% year-to-date timed with OPEC meeting which adds 400K barrels per day crude to global marketplace.  Distillates peaked a day later on 7/6 some 34% higher on the year.  Gasoline and Propane were the clear winners with gasoline +60% higher on the year and Propane +51%.  Late summer 3Q is typically a weaker time for global markets as “profit-taking” typically ensues dragging other markets with it, prior to the seasonal stronger sales and retail spending typically seen in the 4Q.

Key Points

  • OPEC+ agreed to add 400K barrels of crude per day partially relieving some market tightness
  • Fed Reserve discussing they may need taper sooner and possibly pull Fed Funds interest rate hike sooner than expected causing a rallying in the US dollar putting pressure on crude prices
  • COVID delta variant news headlines has caused knee jerk weakness in energy prices (ex propane) doing technical damage putting a lid on the 9 month uptrend
  • Domestic propane stocks below 5 year averages heading into start of increased demand from crop drying and heating season
  • Bull case inflationary pressures from recent CPI data suggesting inflation is not transitory

Guidance

We are advising Wholesale and Commercial customers take advantage of the recent ~10-15% retreat in energy prices.  Propane rally being the outlier as strong domestic exports all summer have capped seasonal price weakness with much lower stock builds.  We expect propane to respond strongly if crude oil resumes its ascent back to near-term highs.

Disclaimer: This report is intended solely for informational purposes only. Shipley Energy Company does not warrant or attest to its accuracy. All actions and judgments taken in response to this report are the recipient’s sole responsibility. Shipley Energy Company shall not be liable for any direct, indirect, incidental, consequential, special, or exemplary damages or lost profit resulting from this report.

Aug 23, 2021
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