Energy Market Update April 2022

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

Watch Our Market Update Video – Presented by Ron Martin

The war on Ukraine continues to disrupt global energy markets and new factors like shutdowns in China and insufficient natural gas storage in the US is causing even more disruption. Dozens of major Chinese cities are in full or partial lockdown causing lower demand and reduced supply from Russia.

In late April, Russia banned fuel exports to Poland and Bulgaria. This action prompted further discussion for the European Union to ban more Russian oil imports and has been a positive driver of oil prices. Wild swings in the oil markets are forecasted to continue.

Natural gas continues to surge and is currently sitting 114% higher than it was January 1st. Temperatures in the west aren’t expected to warm up until mid-to-late May, causing an above-average demand for natural gas this time of year. Natural gas storage inventories are 21% less than the same period last year.

In the electricity segment, April saw new 13-year highs for the PJM grid. The forward 12-month curve increased 41% to 10.02 cents per kilowatt hour. Pre-covid rates are no longer a reasonable standard to compare today’s prices to. The team at Shipley Energy advises customers to budget for higher energy costs because the factors contributing to a bullish energy market are not going away anytime soon.

Additional Points

  • The latest reports show that current coal production is sold out through the end of the year with no new expected supply to come online.
  • NG also faces similar issues with an inability to ramp up production in the near term.
  • PA is poised to enter RGGI which would raise production costs for in state coal around $10-15/MWh and NG around $6-8/MWh according to EBW News.  But there is a chance this is overturned by the winner of the election later this year. Because of these factors weather will likely have an even larger than normal impact going into this summer.

 

 

Petroleum Market Update

Oil prices continue to be affected by the war on Ukraine but a new factor, shutdowns in China, poses new problems. There are concerns about whether Chinese oil demand will remain strong in 2022. Some analysts are calling the lack of demand in China a temporary setback for oil prices. Saying that the variants that are causing the mass shutdowns will pass and production will go back to normal. However, only time will tell.

From a more long-term view, what’s going on in Russia is far more serious. Russia’s move to stop fuel exports to Poland and Bulgaria is pushing the European Union to increase discussion on banning more oil imports from Russia. JPMorgan Chase warned that if the EU acts too quickly to ban Russian oil, it will displace more than 4 million barrels per day, which could drive prices to as high as $185 per barrel.

US oil giants like Exxon, Total, and BP are leaving Russia, and stranding their assets. These factors equate to a long-term, systemic problem with production in Russia, which could ultimately lead to 3 million barrels of oil a day coming off the market. This is a very big deal for long-term prices.

Watch the petroleum market update video on YouTube.

 

Key Points

  • US and global distillate supplies remain VERY tight stoking historic volatility in futures prices.
  • Parabolic price swings causing a “volatility trap” in front and near term futures prices reducing liquidity and open interest which further exacerbates violent price swings.
  • This front month volatility is causing sustained historic backwardation beyond what has ever been seen before in modern times, pulling wholesale and retail basis with it.
  • Russian crude production already seen waning due to war in Ukraine, with imminent European Russian oil embargo looming.
  • US continue to export diesel and other middle distillates to areas of the world commanding higher prices further crimping domestic supplies.
  • Gasoline supplies to come into focus as most refineries are pointed towards yielding more distillates, restricting available gasoline, especially in the northeast as supplies wane.
  • Crude oil to remain rangebound near term and supported at $95-$114 per barrel, as lockdowns in China, global crude Strategic Petroleum Reserves releases, and Federal Reserve induced economic slowdowns remain.
  • OPEC+ is sticking with their original plan.
  • JCPOA nuclear deal and sanctions with Iran shelved.
  • Inflation is still at 40+ year highs with no relief in sight while food and energy commodities pricing remaining elevated.

Action Advice:

Volatility for refined products and other commodities to remain sky-high. Producers, traders, and market participants have continued to decrease with unprecedented market backwardation and volatility further decreasing any incentive to carry product inter-month if not managed correctly. The feedback loop for this month remains. Higher backwardation, lowers liquidity, increases volatility and elevates basis. As stated all year we do not expect the volatility to abate for the balance of 2022 and expect the back months to continue to “roll up” to meet prompt month price levels. Barring any economic collapse or deep recession or complete reversal in OPEC policy we believe higher fuel costs are here to stay. We suggest reviewing new enhanced customized fixed and variable strategies with your sales advisors to help alleviate upside price risk.

 

 

Natural Gas Market Update

With inflation’s exaggerated effects on energy prices, we have seen significant increase in energy prices in the near term. The graph shows us that the price for natural gas for mid-’23 and forward has not risen like the nearer term prices have risen. If you need natural gas during this time period starting Spring ‘23, now would be a good time to lock in rates that are significantly better than the nearer term rates.

 

24 month natural gas futures pricing graph from Shipley Energy

Since electric (power) prices are associated with the cost of natural gas, this thought also generally applies to electric rates.

Natural gas continues to surge and is currently sitting 114% higher than it was January 1st. Temperatures in the west aren’t expected to warm up until mid-to-late May. This is causing an above-average demand for natural gas this time of year. Natural gas storage inventories are 21% less than the same period last year.

Key Points

  • The Energy Information Administration (EIA) reported that inventories are 1,490 Bcf. This is 21% less than the same period last year and 17% lower than the 5-year average.
  • Dry gas production continues to not respond to near-term prices and is on par with last year (5/2021 daily average).
  • The forecast for a very hot summer remains in place as a strong plank of support under the near-term market.
  • The May 2022 NYMEX Natural Gas contract expired at a price of $7.267. That expiration price is well above the April 2022 expiration price of $5.336 and shows the continued volatility that has persisted in the natural gas market. The current rally that has pushed NYMEX prices above $8 from June 22-Feb 23 is being driven by continued global energy supply concerns and the prospects for high gas demand over the summer to fuel electricity generation.
  • Forecasts for the Northwest and Northeast are calling for colder-than average temperatures next week. Meanwhile, drought conditions in California are likely to curtail hydropower capacity and drive demand for natural gas to fuel power generation even higher.
  • Gas flows to LNG (liquified natural gas) terminals for export were up to 12.5 Bcf/day, a +4% increase week-over week.
  • The EIA Natural Gas Storage report showed a storage build of 40 Bcf for the week ending April 22. Gas supply in storage continues to trend along the low-end of the five-year historical range for this time of year.
  • Total natural gas storage stocks totaled 1,490 Bcf, which is lower than the five-year average and lower than last year at this time.

Action Advice:

We recommend that those looking to renew in the near term reach out to account managers for daily price updates. The opportunity to lock in on days when pricing is lower relies on staying up-to-date on moves in the market. Customers should review fixed natural gas terms in the 24-36 month range to secure their gas supply over a longer term and take advantage of lower prices and less volatility in the months beyond the current 12-month curve.

 

 

Electricity Market Update

The climb continues with no end in sight for the electricity world. April saw new 13-year highs for the PJM grid. The forward 12-month PPL curve increased a whopping 41% from 7.09 cents to 10.02 cents per kWh. These are energy-only rates, which historically have accounted for about 60% of a customer’s all-in fixed price. Adding in Capacity, Transmission, Ancillaries and GRT could easily produce all-in fixed rates of more than 14.00 cents per kWh for a business looking to go short-term.

The good news is that April 2023 begins a notably lower strip of energy which only drops lower in 2024 and beyond. For example, a calendar 2023 strip in PJM Western Hub is trading around 7.40 cents and the same strip in 2024 is down to just under 5.00 cents flat. Now all of these rates are far north of pre-Covid numbers which fell well below 3.00 cents per kWh… but as we have said before, pre-2020 is no longer a reasonable or relevant standard to compare against. Everything has changed post-Covid, post-inflation, post-LNG, and post-Russia/Ukraine, and even utility prices to compare are finally getting the memo.

First Energy announced its small customer prices to compare for this summer, showing a 42% increase in Met-Ed to 10.62 cents and a 55% increase in West Penn Power to 10.11 cents. Each utility is posting its highest rates ever in the deregulation era.

Key Points

  • April saw new 13-year highs for the PJM grid. The forward 12-month PPL curve increased a whopping 41% from 7.09 cents to 10.02 cents per kWh.
  • First Energy announced its small customer prices to compare for this summer. Met-Ed saw a 42% increase to 10.62 cents and a 55% increase in West Penn Power to 10.11 cents.
  • Heightened heating and cooling loads in several regions along with slow production growth continue to have a bullish effect on the market due to their impact on storage projections.
  • Forward prices have seen a meteoric rise this week.  The largest moves were in the upcoming summer and winter months, but for the first time in a while we saw large increases all they way out to 2025.

 

Action Advice:

  • Large customers renewing anytime in 2022 would do well to compare their timely renewal with an April 2023 start to gauge the difference. It may be enough to turn a historically all-in-fixed-only user into someone willing to lock in the future prices now but take some risk during the “winter gap” assuming that current forward prices are overhyped.
  • Large customers renewing anytime in 2023 would do well to follow suit. You may have avoided the train wreck of the next 11 months, but that doesn’t mean you should wait until next year’s rates look more like this year’s. The bullish factors are not going away anytime soon.
  • Smaller customers renewing between now and July 2022 should budget for higher energy costs and call anything less than a 70% increase a win. The historical strategy of jumping off to utility rates once suppliers get more expensive will not work when nearly all utilities are costing at least 10 cents.

 

April 2022 Energy 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.