Energy Market Update January 2022

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

 

Natural Gas Market Update

Key Points

  • The market is offered “1300”, meaning 1.3 TCF remaining in storage by 4/14/22. Average is considered about 1.7 TCF and it starts getting scary near 1 TCF due to low pressures.
  • The April NYMEX is now flirting with $5.00. Some of this move could be pricing in the risk that the geopolitical landscape continues to degrade, putting even more of a bid under our LNG exports, continued inflation concerns, etc.
  • Weekly natural gas withdrawals from working gas storage continue to be higher than originally estimated.
  • The market is preparing for another cold event eerily reminiscent to what happened last February with a deep freeze into Texas.
  • Cash prices moved to $8.00 in the south, have been holding steadily over $10.00 into New England, and hovering around the $5-$6 range in PA and Ohio
  • Financial markets reacted today with an upward move of around $.70 in the March NYMEX contract; the rest of the summer moved up $.35 to about $5.00
  • Storage deficit is expected to widen as cold spreads to the eastern part of the country into the 15 day period.

Action Advice:

The market saw more of a move in the final winter contract (March) vs summer months due to the impending cold, however the more gas we drain from storage, the more will need to be replaced this summer. $5.00 summer gas does feel overdone, however the market is still assessing how much of an additional dent is going to be put in storage with this cold event. Waiting for lower prices is an option, however it will rely on the balance of winter weather backing off a bit. If we see a mild March forecast, then I think waiting would be the best play. We’re keeping a close eye on the End of Season Storage chart in hopes to get some insight on what future pricing will look like. Summer natural gas pricing will be directly impacted by the additional storage draw down. We urge customers to speak with their account managers to discuss options they have available to them to reduce negative cost and budget impact.

 

Electricity Market Update

After hitting 13-year highs in November, forward electricity pricing took a decent drop heading into the new year before rising sharply again in January.

Recent History of the PPL 12-month Forward Curve

  • Today: 5.62 cents/kWh
  • November 4th (the high): 6.00 cents/kWh
  • Late December (the low): 4.40 cents/kWh

Key Points

  • Natural gas is a significant price driver for electricity so as a general rule, when natural gas goes up, power goes up.
  • The primary reason is very likely geopolitical factors in Europe and China. Western Europe experienced wind power shortages last year and needed natural gas to replace it, but Russia refused to open its pipeline. China experienced coal shortages and also needed natural gas. In both cases, the U.S. came through to max out our LNG (Liquified Natural Gas) deliveries but this has caused prices to rise sharply in the U.S. and stay there.
  • Lesser factors contributing to the increase are inflation, post-pandemic recovery, and short-term cold weather overreactions.

Action Advice:

If your current electricity contract covers you through the spring, wait out the winter to see if the current rally softens up. Electricity prices are much more palpable when natural gas is closer to $3 (and the forward electricity curve is below five cents). If you’re a March or April start, it’s time to look at pricing and consider either a short-term contract or (for larger users) a product that locks in some of your energy and lets the rest float till a more advantageous time. But the #1 priority for any energy-buying business right now should be to avoid variable pricing with no ties to the market – for example, the kind you get in Month 13 of a 12-month contract. This is where you open your bill to a surprise of 20 cents per kWh or more.

 

Petroleum Market Update

Key Points

  • The heating oil curve market structure reached the highest backwardation since 2014 representing very tight inventories met with substantial increases in demand related to colder temperatures nationwide
  • Geopolitical unrest in Europe between Russia and Ukraine has cast serious doubt on natural gas and LPG energy supplies, causing supply reverberations across the whole energy sector
  • OPEC has continued to slowly increase crude oil supply to the global markets according to their 2020 production plan, while demand continues to outpace production supply
  • Flight to commodities continue to outperform and attract financial flows away from underperforming equities and bonds
  • Several large investment banks and commodity desks continue to call for +$100 crude oil this year

Action Advice:

With historic backwardation indicating higher demand for energy contracts, we continue to reiterate to customers that they should review their budgets and fixed fueling needs. Contracts dated for further in the future are still priced well under near term months. With overall prices at 2010-2014 levels current budgets will need to be reviewed in anticipation for a higher priced fuel environment. This negatively impacts cash flows and financing budgets.  Consideration to lock in a partial of budgeting fuel needs should be highly considered.

 

Chart of February opening prices

 

 

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.