Energy Market Update December 2022 Recap

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

 

Petroleum Market Update

2022 was the most volatile year for petroleum and refined product prices on record in terms of contract notional value.  Heating oil futures saw contract highs of $5.86 per gallon on April 29.  In stark contrast, in July 2008, during the Great Financial Crisis, was the last time we saw prices this high. Gasoline (Rbob) saw its peak record all-time high in June at $4.3260 during the height of the summer driving season, smashing the prior record highs in 2008 which were $3.5710.

Energy prices had already begun their ascent well prior to the volatile February breakout of the Russian-Ukraine war. This was in large part due to shuttered refining capacity, and much lower crude production environment during the Covid-19 recovery.  Over the past two years, the U.S. alone saw six refineries closed or repurposed, drawing substantial transportation fuels out of the market.  This environment impacted regional basis substantially which saw pipeline and rack basis experience highs of $1.20 – $1.50 over NYMEX futures.

2022 also brought confluence with the highest inflation in 40 years, creating a volatile cocktail for violent price swings. The Fed’s appetite to raise interest rates at an incredible frequency caused the value of the dollar to soar to multi-decade highs, which inherently put a cap on energy prices and the economy.  The second half of 2022 witnessed China, the world’s largest crude oil importer, once again administer sweeping lock downs, curbing their demand for crude oil and energy production.  At time of writing, China is lifting lock downs which will raise crude demand substantially in 2023. In conjunction with this, global crude demand growth of 1-2 million barrels per day will continue, keeping the energy commodities super cycle intact.

OPEC+ nations enjoyed higher energy prices ultimately due to global production not keeping pace with global demand.  2022 peak WTI crude oil prices topped out at $130.50 per barrel, eventually succumbing to substantially reduced demand from China, global recession fears and the U.S. strong dollar.  WTI values fell to $70 per barrel this month, erasing the entire 2022 rally after all the black swan events that occurred.

2023 is signaling to have key events that could continue to disrupt global supply of distillate and gasoline refined products.  On February 5th, Europe is expected to ban Russian refined products which is deemed to draw heavily on U.S. Gulf Coast refined products.  This would result in much-needed supplies being exported and shifted away from the Colonial Pipeline, which is the major supply artery for the Northeast.

Buckeye Pipeline and Energy Transfer’s refined products pipelines that flow west from the Midwest have proven inconsistent regarding sustained supply into PA and NY.  Increased refining production is coming back online in the Northeast, which a couple years ago, was considered permanently shuttered and lost.

Key Points: 

  • December saw record cold temperatures across the country, which took over a dozen refineries offline and shutting in an estimated 2 million barrels per day of refined products.
  • Distillate basis seems to have found a seasonal bottom; early January is expected to warm up and then winter is expected to return and show its teeth.
  • Propane’s long cascading price slide may start stabilizing here at 60-70cpg as the seasonal draws ramp up.  Use for petrochemicals demand nowhere near last year’s high as manufacturing is down.
  • Gasoline demand saw its highest demand mark around Christmas and continues to quietly trend higher post seasonal December lows.
  • Rack basis continues to move higher as demand for heating oil surges.

Action Advice: 

We expect distillate and gasoline prices to be rangebound in the very near term.  The data for the four-day refinery outages across the country will start to be reported next week, which could see some substantial draws in stocks due to production curtailment from the freezing cold temperatures seen at Christmastime. Heating oil futures move above $3.42 brings signals that $3.70-area is possible, and an Rbob move above $2.52 brings the $2.70 200-day moving average back in view.   

If you have been contemplating locking in any fixed price product, we are suggesting now is a good time to do so as major support of ~$3.00 – $3.14 for heating oil and $2.00 for Rbob has held.

Shipley Energy will diligently work with our customer base in order to provide council and advice to navigate the current market and supply. Please continue to speak with your Shipley Energy Fuels Advisor to help your business navigate the current market. 

 

 

Electricity Market Update

December showed up with the extremely 11th-hour market drop the 2023 bears were waiting for. The 2023 strip plummeted from 8.11 cents on November 30th to 6.41 cents, as the days leading up to and following Christmas weekend started a collapse that extended well beyond the winter strip. (These prices are energy only and do not equate to a complete delivered supply price.)  

It was a tale of two markets, as customers on December index rates braced for painfully high prices during the extreme cold that started December 22nd, but those looking at forward months still managed to find their downside. This is due to a variety of short-term bearish factors: expectations of a warm January, the Freeport LNG return being pushed out at least another month, and the recent success of entering into natural gas withdrawal season at only a slight deficit to last year. These bearish factors, however, are almost as fleeting as the Christmas Polar Vortex and should be looked at as such–the overall market still favors the bulls.  

This is the third year in a row that the electricity market has seen a significant post-Christmas dip, and in the past two years it bounced back hard in January. Europe is still in an energy crisis with no easy solution and is willing to pay at least five times what the U.S. pays for natural gas. Unless that situation changes and the war comes to a peaceful end, that is the primary long-term market factor driving prices. 

Action Advice:

The takeaway is that this current dip should be viewed not as the beginning of a downhill buying spree, but a short-term window of opportunity. It only takes one bullish factor – a frigid February forecast, the return of Freeport, an escalation in the war, or a new Congress trying to shake things up – to remind the market where prices should really be. If you’re not locked in yet for your February, March, or April start, take care of it this week. Make sure you are getting expert advice from a trusted supplier or an advisor that will protect your best interests. 

 

 

Natural Gas Market Update

The January 2023 Nymex Natural Gas contract settled at $4.709/mmbtu, down significantly from last month’s December 2022 settlement price of $6.712.  

The sudden reversal of the natural market back to lower prices has come on the heels of unseasonably warm weather for much of the country following the frigid temperatures and winter storms of Christmas weekend.  

The current prompt Nymex contract of February 2023 is currently trading in the $4.00-$4.15 range, down almost 50% from the extreme high prices the market experienced over the summer. High summer temperatures drove major demand for natural gas to fuel electricity production and gave the market reason to fear supply shortages come winter, based on the levels of available gas in storage. 

In the short term, these supply constraint concerns have been put on the back burner in both the U.S. and Europe while temperatures remain warmer than normal. 

There is also the remaining delay of the return of the Freeport LNG (liquified natural gas) facility in Texas. When in operation, the Freeport facility sends 2 BCF (billion cubic feet) per day of natural gas to ports in Europe and Asia. That gas has been available to meet heating demand and build storage supplies here in the U.S. while the facility has been offline. Freeport is now projecting a potential restart in late January. 

Factors impacting the natural gas markets currently:

  • Warmer than average temperatures across most of the U.S. reducing heating demand.
  • Anticipation of potential return to cold temperatures toward the end of January with U.S. storage levels still slightly lagging the 5-year average storage level.
  • The status of the Freeport LNG export facility.

Action Advice:

With Nymex natural gas market prices down almost 50% from the peak prices over the summer, now is a great time to look to lock-in natural gas supply rates. Reach out to your Account Manager for refreshed pricing to reflect the market drops over the past few weeks. 

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

 

January 2023 Natural Gas NYMEX Settlement Price: $4.709/mmbtu 

Last month: December 2022 Natural Gas NYMEX Settlement Price: $6.712/mmbtu 

Last year: January 2022 Natural Gas NYMEX Settlement Price: $4.024/mmbtu 

 

December Market Opens and Closes

 

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.