The past year in the commodity markets has been one of extremes, including the Russian invasion of Ukraine, energy disruptions to Europe, and natural gas leaving the domestic market in the form of LNG like never before to the highest bidder. This was, for all intents and purposes, the first time we have seen natural gas as a global commodity rather than a domestic commodity, exemplified by the expansion of LNG liquefaction plants around the East Coast.
In the past year, the bulls raged starting in February and culminating in July 2022 with $9.00 natural gas. As natural gas comprised on average 46% of ISO-NE’s fuel mix in 2022, we think it’s important to look at what caused this. The main factors are:
- Demand for LNG on the international markets driving willingness to pay multiples of the value in U.S. domestic market.
- Storage coming out of winter 2021-22 that was below the five-year average and within striking distance of the five-year low.
What eased the tension on prices? There were three main factors that caused commodity prices to falter in the second half of 2022 and throughout the winter period:
- Freeport LNG, the nation’s second-largest LNG export facility, had a fire, shuttering the facility until March of 2023.
- Lack of weather during the winter caused lower-than-expected pulls from storage, thus alleviating the supply tightness through demand destruction.
It’s important to note that from February through June/July of 2022, the NYMEX Natural Gas Contract was firmly bullish with steep backwardation in the markets (Year 1 well over Year 2, etc). Currently, the market has a very bearish structure.
The current Contango highlights there is roughly a $0.46 premium built into the one-year vs. the 6-month strip and an additional $0.40 built into the 2-year strip. Current prompt month is trading in the $2.20 area, so there is a $0.30 premium for the six-month over the prompt month.
What does the structure of the curve tell us?
1. There is a lot of risk premium built in for uncertainty.
- The risk of an extremely hot summer dampening the storage injections and/or global LNG demand resurgence, which could ease the bearish tone of the market.
- Recession, yes, the “R” word. Even a moderate recession would put a cap on energy prices. However, moves to curb a recession could devalue the dollar, taking away some of the impact from commodity prices.
- Geopolitical risks. Will China invade Taiwan? How will the Russia-Ukraine conflict evolve? Each of these contribute to the near-term price uncertainty.
2. There is a strong incentive to inject into storage early.
- Heavy buying early in the season to capture storage spreads. This could be bullish in the short term but will weigh heavily on the risk premiums for the fall and winter. Heavy injections early will see an abundance of supply ready to meet winter demand and will send prices for September ‘23 through March ’24 downward.
3. Production growth.
- If oil prices stay elevated, there will be more dollars going toward drilling for oil. The uptick in natural gas supplies from 2022 – 2023 has been primarily through associated gas (gas produced associated with oil production – previously “flared gas”).
Today’s businesses are staring down a gauntlet of uncertainty and need the ultimate in flexibility to manage their way through this period and into the future.
- Recession fears
- Bearish natural gas prices (the primary feedstock for electricity)
- Geopolitical risks
- Transforming their business to sustainable energy
Given these uncertainties, businesses must ensure they have the utmost flexibility in their energy agreements, allowing them to maneuver through challenges with agility. Many supply agreements restrict minimum and maximum usage and severely impair strategic decision-making geared toward minimizing long-term costs and monetizing the near-term benefits of behind-the-meter technologies (such as battery storage, solar, and back-up generation).
By contrast, Actual Energy’s innovative supply offering gives businesses the total transparency and flexibility they need to tackle unforeseen challenges head on and to proactively manage their clean energy transition plans. Beneficial electrification drives usage up. Renewable generation and efficiency technology drives usage down. Major grid-level generation and transmission & distribution initiatives will continue to reshape the wholesale market pricing and carbon curves. Actual Energy’s offering is uniquely positioned not just to survive these fundamental shifts, but to leverage them to your business’s full advantage.
Brian has over 30 years of experience in the energy industry, including 15 years in commodity trading and over 15 years as a senior executive of high growth retail energy businesses. Brian’s retail energy experience includes COO, President, and CEO roles with multiple organizations at various stages of maturity. He has experience leading companies from start up to fully operational and infancy to market leader. Brian’s experience also includes executing turnaround strategies and working closely with private equity ownership groups to define and implement those strategies. He has experience in NYISO, ISO NE, PJM, MISO, ERCOT and all of the open natural gas markets in the Mid Continent, New England, Mid Atlantic and Southeastern United States.