Our Shipley Energy Commercial Solutions Team is excited to share with you the February 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
Natural Gas Market Update
The end of February was warmer than expected across most of the United States, causing total consumption of natural gas to decrease substantially. This included a 15% decrease in consumption in the residential and commercial sectors.
Lower demand and increased production led to a slight increase in the average natural gas supply. However, with weekly net withdrawals from storage continuing to be higher than the five-year average, the supply-demand balance will remain tight.
As we look forward to spring, the natural gas market is likely to stay volatile. This is especially due to the situation between Ukraine and Russia, which analysts are saying plays a key role in the overall direction of the natural gas market.
The March 2022 NYMEX Natural Gas contract expired at a price of $4.568. That expiration price is well below the February expiration price of $6.265 which experienced a significant price run-up based on frigid winter temperatures for most of the county in January. The March 2022 expiration is the highest March NYMEX settlement price since 2014.
European natural gas prices surged as much as 36% on Monday 2/28 as Western nations agreed to impose new penalties on Russia, though they excluded energy products.
Europe relies on Russia for about one third of its natural gas supply, with many of those shipments flowing via pipelines that cross into Ukraine.
The EIA Weekly Natural Gas Storage report for Thursday 3/3 is expected to show a withdrawal of approximately 136 Bcf from underground storage in the prior week. The withdrawal would be greater than last year’s 132 Bcf pull and the five-year average withdrawal of 98 Bcf.
Estimated gas flows to U.S. LNG (liquified natural gas) export terminals were up 13.9% week-over-week and are now near a record high.
German Chancellor Olaf Scholz announced on Sunday the decision to swiftly build two LNG terminals to reduce the country’s reliance on Russian gas imports following the Russian invasion of Ukraine. In the longer term this is expected to lead to higher prices for natural gas in the U.S. and abroad since more U.S. LNG supply will be needed to meet the higher demand in Europe
We recommend that customers look into 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 forward electricity curve is in a challenging spot for anyone coming off of pre-Covid or early-Covid contracts. We hit a 13-year peak in November, had a brief respite, and have all but returned to that peak in recent weeks.
Forward ‘power prices’ continue to be higher year-over-year, but with weather predictions showing a mild start to March it’s likely that we will see some downward pressure on short-term prices.
The push for corporations to become more socially and environmentally conscious has had a serious impact on demand. Both Pennsylvania and Ohio are proposing new legislation for their Renewable Portfolio Standards that increases the percentages of renewable energy that’s needed to meet state load requirements.
With April now being the prompt month for both electricity and natural gas, we have essentially made it through winter mostly unscathed. There are no strong weather fundamentals to support prices.
The real reason the market is up is exactly what one might expect: Russia invading Ukraine has sent a shockwave through the world and nearly every market has been affected. Most of the increase for electricity was already factored in prior to the invasion, because the primary energy implication is that the Nordstrom 2 pipeline will not be coming online and the severe natural gas shortage Europe has experienced since the summer will require continued exports of U.S. LNG (Liquified Natural Gas). China has also experienced coal shortages and needs our gas. The only reason the price doesn’t continue to break through ceilings is that we were already maxed out on exports prior to the invasion. Still, as long as the narrative continues that countries overseas are willing to pay a lot more for our energy than we are, our price points will stay uncomfortable high.
A very small consolation to the energy market news itself is that NITS (transmission) rates in Met-Ed and Penelec dropped in January by 10% (their largest and only second-ever decrease since deregulation). That means that customers in long-term contracts who had higher NITS rates built in should have started to receive a credit.
General industry expectation is that both NITS and Capacity (which together can make up about 40% of your price) are relatively high right now and should be passed through at cost on your next contract. If you lock them in as part of your all-in fixed price – which is standard for many Shipley customers – you’re likely going to overpay in the long run.
Electricity prices are much more palpable when natural gas is closer to $3 and the forward electricity curve is below five cents. However, the reality is that the market basically has only one mover at this point and there’s no short-term relief in sight. If you’re hedged through May, sit tight for a month. But if you’re an April or May start, it’s time to look at pricing and consider either a short-term contract or a product that locks in some of your energy and lets the rest float till a more advantageous time. Your Shipley Energy consultant can walk you through this process and its potential impacts on your budget. These conversations are harder in an up-market, but we are one phone call away in times both high and low.
Petroleum Market Update
The crude oil market continues to look bullish, mostly due to the situation with Ukraine and Russia. Commonwealth Bank analyst Vivek Dhar noted that “If a Russian invasion of Ukraine takes place, the global benchmark could spike above $100/bbl”. This statement later proved itself as true the afternoon after the initial Russian invasion. As it stands, United States’ crude oil prices are just below $100, up 40% since the beginning of December.
Also contributing to rising crude oil prices is a global energy deficit due to the Organization of the Petroleum Exporting Countries struggling to hit quotas. Top consumers have been calling for increased production to help cap surging prices, but even if an Iranian deal can be reached, prices will still remain volatile in the near-term because Iranian oil wouldn’t return until later this year.
2022 Russian invasion of Ukraine has potentially upended global energy supply, trading, and balances of power with heightened risk of disruptions.
Crude oil eclipses $100 per barrel for the 1sttime since July 2014, pulling gasoline, distillates, and propane with it.
Biden Administration halts new drilling in legal fight over climate costs.
OPEC+ is expected to keep monthly supply increases steady in compliance with their agreement, as producing nations already cannot meet production quotas partially due to lingering effects of underinvestment due to COVID-19.
Regional diesel and heating oil basis markets haven risen sharply in response to decade low supply stocks and very tight markets.
Propane and LPG prices have risen sharply in response to already tight market conditions, and decade low inventories that continue to be driven lower on sustained cold/demand.
Overdue seasonal global refinery maintenance schedule picks up, taking transportation fuel production out of the market when needed most coming into spring/summer driving season.
We continue to reiterate that customers review the impact of overall higher fueling costs impact on cash flows. Historic distillate backwardation continues to project that diesel, heating oil, propane inventory will remain very tight. Winter gasoline demand has held up significantly well as demand continues to rise along with consumer mobility, highlighting how low supplies are. We continue to suggest to review strategies with your sales and marketing advisors to help alleviate upside price risk and overall volatility.
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.