The Shipley Energy Commercial Solutions Team is excited to share the September Energy Market Update to inform you of trends, weather, and other factors impacting the energy market. Read the August 2023 energy market update here.
The October 2023 NYMEX Natural Gas contract expired for $2.764/MMBtu. That is down over 59.8% from last year’s historically high October settlement price of $6.868/MMBtu. The October settlement price has continued the trend since March of NYMEX prices settling below $3.00. The average settlement price for March through October of last year was 7.19!
As we move into the fall, we continue to see strong levels of natural gas in storage to meet winter heating demands. The level of gas available in underground storage is currently 12.5% higher than last year at this time and over 5% higher than the 5-year average.
While we remain above the year-ago and 5-year average levels, that gap has narrowed in recent weeks due to high summer temperatures sparking electricity demand to meet air-conditioning needs. As of 2022, nearly 40% of all the electricity generated in the U.S. comes from power plants using natural gas for fuel. With summer temperatures climbing every year, the levels of power burn and associated summer natural gas consumption are likely to continue to climb in unison.
This will be a trend to continue to watch each year as summer moves into fall. The level of natural gas available in winter storage by the time we reach mid to late October goes a long way in either elevating or dismissing concerns of gas supply shortages during the coldest days of the year.
While the NYMEX prices in the shorter term (the next 6-12 months) remain at multi-year lows, market prices for calendar year 2024 mostly stay above $3.00, while winter months in 2025 are over $4.00.
These higher prices further out reflect the anticipation for higher priced gas in future years as the U.S. continues to export more and more liquified natural gas (LNG) to countries worldwide, making raw a more valuable and in-demand global commodity.
Factors Impacting the Natural Gas Markets Currently:
The NYMEX natural gas market prices for the next 12 months remain primarily in the low to mid-$3 range, down well below the historically high market prices of fall 2022. Act now to lock in low fixed natural gas supply rates for the next 6-12 months for the lowest current price offers.
Other rate 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.
October 2023 Natural Gas NYMEX Settlement Price: $2.764/MMBtu
Last month – September 2023 Natural Gas NYMEX Settlement Price: $2.556/MMBtu
Last year – October 2022 Natural Gas NYMEX Settlement Price: $6.868/MMBtu
After August showed some increases in the forward curve, September seemed determined to hold the line and stop there. The PPL forward 12-month curve “increased” from 4.57 to 4.58 cents per kWh – moving very little. This is against a backdrop of natural gas pricing that stayed range-bound in the mid to upper $2 range.
Often, the market dips coming out of summer as one last sigh of relief following a tumultuous season. But for all of summer and then some, the market has behaved like a British palace guard: unflinching no matter what you do to try and spook it. In hindsight, it makes sense that the same electric market that was virtually unresponsive to many a bullish factor – the extreme heat of July, no signs of an end to the war as winter draws closer, and a PJM whitepaper of a near future with not enough electricity to go around – and would stand still and do nothing when the shoulder season finally arrives. It paints the picture of a market determined to stay in the mid 4-cent range at a time when many customers are holding out for “just a little lower” with their 2024 decisions.
December 2023 starts now have 55 days or less to make a move, and January 2024 starts have 85 days or less. If your renewal is one of those months and your preference is a fixed all-in product to minimize risk, understand that waiting much longer is one of the riskiest plays you can make.
Bond Yields and Interest Rates Charge to 16-Year Highs – Volatility Spikes
The push-pull of financial and physical fundamentals on energy prices comes roaring back. The first half of September continued the strong rally in energy prices, especially distillate. Distillate prices rallied and saw a 2-week run from $3.0980 to $3.5092, tagging the winter of 2023 highs before hitting technical resistance and reversing lower for the final two weeks of the month. We expected near-term price consolidation at 2023 highs prior to the seasonal drawdown in distillates for heating. At the time of writing, it is no coincidence distillate ULSD futures are trading at the same price levels we saw exactly one year ago and back to where the September rally began.
Large banks’ recent call for a “soft landing,” as the Fed reiterates its hawkish tone to keep rates higher for longer; the economy remains resilient, and inflation remains elevated. Energy prices have rallied significantly, putting upward pressure on prices along with inflation measures and interest rates. Since mid-summer, energy prices traded higher in correspondence with the fundamental tightness of the overall market for petroleum products. Energy markets looked past the regional banking crisis from earlier this year and are now back to focusing on the economic and financial markets risks and the impact of further spiking interest rates. The fundamental bullishness of depleted low crude and refined products supply remains, but from time-to-time outsized market events cause risk-off periods where market participants liquidate large positions, putting downward pressure on prices. We continue to point out the fact that diesel prices are anchored to global and economic activity. If broader financial markets are calling for increased risks and lower economic activity again, we could see continued pressure on energy prices in the near term.
Gasoline prices continue their seasonal fall with larger than expected slump in demand. Gasoline futures rallied in the first half of September and have since fallen 20% back to September 2022 levels. Markets have memory and are trading right back to levels where recession and high inflation pressures first came into focus. Our gasoline price targets $2.18 – $2.20 with an overall macro target of $1.95 – $2.00.
A look forward, more refinery turn arounds are scheduled in Q4 with estimates of an additional 2.5M bbls per day of refinery capacity to come offline due to maintenance.
The silver lining for distillates is refinery production is down 500K bbls per day vs. the same period the year prior, while exports remain consistent at ~1M bbls per day. Currently, not much attention is being paid to low distillate inventory levels as bigger headlines are garnering the bearish sentiment. Distillate demand is expected to increase as seasonal cooler temperatures are on the doorstep.
Propane prices remain resilient as exports remain strong due to increased European LPG demand, despite the fact that domestic stocks remain near 2015 all-time highs of 102M bbls in storage.
The regional PA cash market basis remains strong with steep backwardation, while multiple northeast refineries remain down for turnaround maintenance. Maintenance is likely to keep refined product levels in check as the Gulf Coast to New York Harbor (NYH) arbitrage is narrow, not drawing significant products up the Colonial Pipeline. Exports are expected to remain ample. A backwardation market structure continues to steepen, putting upward pressure on the physical cash market pipeline basis. Note that heating oil basis has risen 12 cents, outpacing diesel basis by ~7cpg due to a reduction in RIN prices and renewable obligation costs.
Action Advice: The cost of capital and cash management interest expenses have clearly come into more focus with the continued run-up in nearer-term interest rates. The steepening of the yield curve, where nearer-term rates are higher than long durations, has put stress on borrowers not seen in over 16 years. A rise in borrowing costs and overall upward pressure on energy prices intensifies the need to protect against price risk. Our advice is given HO is below $3.00 and $3.06, is to take action between $2.92 and $2.99 and further action between $2.83 – $2.78 if we get there and to look for a washout in price action. We become more constructive flat price above $2.95 – $3.00. The winter strip backwardation continues to get steeper, indicating a tight physical supply to remain in the interim. With the current volatility in the petroleum and refined product markets, we recommend keeping in close contact with your advisors.
Please speak with your Shipley Energy Fuels Advisor to help your business navigate the current market.
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.