Our Shipley Energy Commercial Solutions Team is excited to share with you the November Energy Market Updates to keep you informed on trends, weather, and other factors impacting the energy market. Want to catch up on what happened in October? Read Here.
Downward pressure on the electricity market can be attributed to predicted warmer than normal temperatures in the US over the next couple of weeks. Warmer temperatures also bring a lower heating demand, causing a near -10% drop in NYMEX prompt-month gas contracts this past Monday. Index prices are continuing their year-over-year increases. The day-ahead index power prices in West Hub for November are averaging $63.28/MWh and are +9% higher than last month’s average and +206% higher than November of last year’s average. The month-to-date average settlement price for the Eastern Hub is currently $69.78/MWh, which is +12% higher than last month’s average and +216% higher than the average in November of 2020.
Seasonally warm temperatures are predicted across most of the country as we prepare to enter the second week of December. This has caused the Henry Hub to fall 14%, or 67 cents/MMBtu bringing a weekly low closing of $4.90/MMBtu on Wednesday. Higher than normal temperatures across the US has a significant impact on the demand for natural gas for heating purposes. Last week, net withdrawals from storage were 59 Bcf, compared to the 5 year average of 31 Bcf and last year’s 4 Bcf for the same week. Working natural gas stocks totaled 3,564 Bcf, 86 Bcf lower than the 5 year average and 375 Bcf lower than last year’s.
November was anything short of market moving headlines and volatility. As crude oil and fuel futures approached the 2011-2014 price range, the negative talk on prices quickly ensued out of Washington on what possible steps could be taken to try and reduce prices. Releasing crude oil out of the SPR was deemed only a temporary fix on supply which initially had the opposite effect on price as the market rallied off the news. The timely news of a new Covid variant Omicron, caused the most technical damage to the charts on the day after Thanksgiving. This was during a low market participant, reduced liquidity shortened session. Crude oil and refined products fell some 13%, ranking it one of the highest one day drops on record. Since then, energy prices have yet to sustain any type of rally, which may take some time before prices stabilize heading into the Holiday season. Fuel prices in particular are much higher than they were they were 7+ years ago due in part to higher fuel taxes embedded in the price at the pump.
The outlier has been OPEC, who has been hit hard early on during the pandemic when prices crashed to negative price levels. They fully understand that covid and lockdowns can quickly have a devastating impact on prices, which is why they have been hesitant to increase global production during a pandemic. By OPEC holding back production, inherently prices are being driven up, but many would argue that rally in energy prices aligns with overall inflation not seen at these levels in 30 years. When you have such a bullish construct in the market, prices tend to overshoot to the upside. Couple this with higher regulations in the US domestic market with overall credit lending much lower to the energy space, you end up in a situation where you have a “positive feedback loop” with all commodities rising in unison. Typically, higher commodity prices usher in a weaker dollar, which was the case for first half of 2021, but with the tremendous amount of government spending bills and supply chain bottlenecks ratcheting up inflation, the market it taking queues that the Federal Reserve will have to act much sooner to cool the economy, raise Fed Funds interest rates in 2022 if inflation isn’t somehow brought under control.
With the current steep selloff in energy, the forward curves are still in backwardation which indicates demand is still bullish and very much present. At current levels the selloff is pricing in a negative 7M barrel per day hit to crude oil demand, which would be an extreme case over the next 3 months which would have to include large scale global lockdowns where we currently don’t see this happening. We have been suggesting to our customers to start taking advantage of the backwardation in the curves into 2022.
Disclaimer: These market updates are 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 these market updates.Dec 3, 2021
Take control of your energy costs