Energy Market Update August 2022 Recap

Our Shipley Energy Commercial Solutions Team is excited to share with you the August Energy Market Update to keep you informed on trends, weather, and other factors impacting the energy market.

 

Petroleum Market Update

Energy futures prices decouple from physical cash basis markets – distillate rallies, gasoline crumbles while crude slides.

Key Points

• The end of August marks waning seasonal gasoline demand and the official end of “summer driving season”.
• Early August, both gasoline and diesel were heavily discounted at the localized racks due to two main headline factors: allegedly crumbling demand and costly carry market structure disincentivizing the pipeline shipping community.
• Recent EIA data suggested gasoline and diesel demand for certain August weeks was the poorest in two decades, giving way to Pennsylvania racks (basis) to be sold off significantly and little resupply available coming into September.
• Market structure, referring to backwardation and the cost to carry product into the next month, remained high all summer, especially for gasoline which was 15-30cpg roll cost.
• Refiners facing poor implied gasoline demand data, last of the summer grade gasoline specification, and weakening margins shifted product slates to yield more distillate.
• Refinery and pipeline shutdown maintenance: this is the first significant maintenance from Pennsylvania regional refiner post Covid and Ukraine war. Pennsylvania and New Jersey lost 350K barrels per day (PES, 2019) and 180K barrels per day (PBF Paulsboro, 2020).
• Refinery maintenance in Trainer, Pennsylvania is taking out 185K barrels per day of current distillate and gasoline supply, coupled with the main refined product artery, Buckeye’s Laurel Pipeline, has caused a severe shortage of product availability.
• Heating product demand is looming, while Northeast refined product stocks are well below the 5-year average and are at critically low levels.
• Colonial pipeline (largest pipeline to supply all the Northeast) fetching higher premiums to the south, steering much needed product away from the Northeast.
• Refined product exports are high. Critical supply of diesel and gasoline that would normally remain in the U.S. is getting exported to South America and Europe, as they are fetching much higher prices than staying home in the U.S. 
• U.S. and European natural gas prices are at all-time highs, prompting electricity power generation to utilize diesel as distillate becomes a large feedstock draw.

Upcoming Market Moving Headlines 

OPEC+ meets September 5th to discuss next crude oil production output quotas  

Why it is important: OPEC+, the world’s largest oil cartel, controls the majority of the world’s oil output. They have already voiced concerns over wide price disconnects between the futures and physical markets. If global recession risks, which have steadily showed up in the futures prices, impact cash market demand, they may elect to cut crude oil production in an already very tightly supplied market. Analysts project this could potentially send prices rallying back to $115-120 per barrel this year if OPEC leaves the door open for further supply cuts. 

Iran and the U.S. have struck a nuclear deal in principle to revive 2015 JCPOA  

Why it is important: If signed, this deal would allow Iran to immediately sell an estimated 70-100 million barrels of oil into the global marketplace, helping alleviate tight supplies which are keeping prices elevated 

U.S. Strategic Petroleum Reserve release of 1 million barrels per day ends September 30th 

Why it is important: The removal of this reserve supply further exasperates an already tight market, while reserves must be replenished. Net 2-million-barrel swing, with demand data starting to rebound 

Refined product export ban (not natural gas or LNG) 

Why it is important: The White House and Secretary of Energy, Jennifer Granholm, have voiced serious concerns of days of available supply for heating and transportation. A ban in principle would curb domestic exports but could upset global supply chains, negating the intended effect  

China lockdowns 

Why it is important: China, the world’s largest crude consumer, have locked down many cities due to Covid. When lockdowns are lifted, demand is expected to spike.

 

Action Advice:

We have been prompting customers to prepare during this summer for the potential of higher distillate demand this fall/winter. Front month heating oil futures lows of $3.1424 were the lowest price levels not seen since April. Last month, we advised that $3.00-$3.25 would remain very solid support and should be bought. A quick and strong reversal off these levels brought the upper end of the $4.15/gal range, which coordinated with major levels of the 2008 highs. Recent profit taking to end the month sent heating oil prices back down to $3.45/gal and have since rallied 20 cents as October has become the front month contract. 

Northeast spot market physical diesel and heating oil remains a serious concern this winter, with exports still drawing ample supply out of the U.S., especially the Northeast where it is needed most. Any refining and pipeline supply disruptions could cause volatile basis price spikes like the market witnessed this past winter of $1.00 or more. Please work with your Shipley adviser to discuss some strategies we are suggesting with our customers to mitigate these risks, protect your supply, and budgets.

 

Natural Gas Market Update

Over the past month of natural gas Nymex trading, the September 2022 Nymex contract continued the trend of volatile trading bouncing between a range of $7.62/MMBtu on August 1st and reaching as high as $10.02/MMBtu by August 23rd.  

The September contract finally settled at $9.353/MMBtu following last month’s August 2022 settlement price of $8.687. This continues a two-month trend of higher month-to-month Nymex settlement prices as energy markets around the world remain high-priced and unpredictable. 

Trading over the past two weeks has also been influenced by the announcement that the currently offline Freeport LNG (liquified natural gas) export facility in Texas will remain offline until at least November 2022. This will continue the availability of up to 2 BCF (billion cubic feet) of natural gas per day domestically that would otherwise have been sent into global LNG markets in Europe and Asia.  

Despite this additional available supply, natural gas futures have shown continued price strength trading in a range between $8-$10/MMBtu. 

There are several factors impacting the natural gas markets currently: 

• Continued global energy shortages 
• Supply reductions and continued uncertainty surrounding Russian natural gas supplies being sent to Europe 
• Strong national demand for natural gas to fuel power generation to meet air-conditioning needs 
• Anticipation of potential cold winter temperatures with U.S. storage levels lagging the 5-year average 

Action Advice:

Even with natural gas futures prices on the rise again, there are still opportunities to lock in longer renewal terms in the 24–36-month range at better pricing. Futures pricing beyond March 2023 drops down below $6, compared to prices in the near term (October ‘22-March ‘23) reaching above $9. Ask your Account Manager about 24–36-month renewal options to take advantage of lower prices in further out months. 

Other options include Basis Only or Nymex Lock deals to separate the two elements of your natural gas price to look for potential value vs standard Fixed pricing. Reach out to your Account Manager today for details.

  

September 2022 Natural Gas NYMEX Settlement Price: $9.353/MMBtu 

Last month: August 2022 Natural Gas NYMEX Settlement Price: $8.687/MMBtu 

Last year: September 2021 Natural Gas NYMEX Settlement Price: $4.370/MMBtu 

 

 

Electricity Market Update

Key Points

• Natural gas and electricity prices remain high through Q1 2023.
• Coal has proven to not be available at a cost-effective price, forcing electricity generators to use high-price natural gas.
• Increased natural gas usage for electricity generation is keeping storage levels well below both last year and the 5-year average – raising fears about winter shortfalls and pushing US power prices up.
• Utility standard offers are being pulled up by the continued high prices, with upward movements of as much as 4 cents/kWh forecasted for several Ohio and Pennsylvania utilities.
• Conflict in Ukraine continues to limit Russian natural gas deliveries to Europe, keeping liquified natural gas (LNG) exports to Europe maxed out and putting more upward pressure on gas and power prices.
• Expect high prices and lots of price volatility in the future – September and October are historically good times to lock in rates. Do not go into winter unhedged if you can avoid it.
• Wholesale energy markets are still showing high levels of volatility, with natural gas and electricity prices continuing to trend up. Utility standard offers, which can be relatively attractive in a rising market, are being pulled up by the continued high prices. As those higher rates take effect, unhedged commercial electricity and natural gas users may have a difficult decision between energy prices that are high now and utility rates that are moving up to match. 

One strategy that continues to cost customers money is the “wait and see” approach. This has not proven at all effective for the last year, outside of a two-day freak occurrence drop in late June 2022. Below are some sobering benchmarks for the 12-month forward PJM electricity curve: 

• December 28th, 2021: 4.41 cents 
• April 25th, 2022: 10.02 cents 
• July 5th (brief drop after Freeport explosion and Supreme Court EPA decision): 7.43 cents 
• August 12th: 9.77 cents 
• Today: 10.49 cents 

Wholesale prices, while volatile day-to-day, are consistently trending upwards. Getting an early start on developing your energy buying strategy continues to result in lower rates and less energy spend. Allowing your business to be backed into a corner and forced to make a poorly timed buy at the last minute is a sure way to pay more.

Action Advice: 

• For consumers who use a large amount of energy, we suggest utilizing a contract structure that allows for a more flexible hedging approach in this market. We continue to see savings of over 1 cent/kWh on index buys vs block purchases, especially blocks involving primarily on-peak load.
• For consumers who use smaller amounts of energy, market timing is critical. We urge businesses to partner with a trusted supplier or advisor that can help you find the lowest rate in the market quickly so you can lock in during a market dip.
• In today’s unpredictable energy market, it’s recommended that you get expert advice. Contact a trusted electricity expert at Shipley Energy today. 

 

 

 

Disclaimer: The market update 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 these market updates.