Energy News: Long-Term Opportunity During Fall Shoulder About to Close?
Energy News: September 24th, 2024 Long-Term Opportunity During Fall Shoulder About to Close? Natural Gasis the largest source of power
Energy News: September 24th, 2024 Long-Term Opportunity During Fall Shoulder About to Close? Natural Gasis the largest source of power
Energy News: September 24th, 2024
In our April 5th Energy Update, we said as we neared this year’s Spring Shoulder Period, the window of opportunity to secure rates at their lowest prices of the year would likely close soon, and we included the following chart in that report:
Shortly after writing our April 8th Energy Update, Natural Gas rallied anticipating increased demand during the Summer before declining as we near this year’s Fall Shoulder Period, and we believe Natural Gas and Electricity prices will again rally anticipating increased demand in the Winter.
In today’s report I will explain why as we are near this year’s Fall Shoulder Period, the window of opportunity to secure rates before they move higher long-term is about to close.
The short-term pattern of Natural Gas reaching lows during Shoulder Periods between the Summer cooling and Winter heating periods is common, but the lows reached during this year’s Shoulder Periods might be critical, because we believe Natural Gas will likely be higher long-term after reaching this year’s lows.
We believe this because as we have explained in previous reports, since 2000, when Natural Gas declined to where it is in 2024, it always preceded higher prices long term.
The primary reason Natural Gas was always higher long-term when it was as low as it is this year is prices were unsustainably low. They are sustainably low when they decline below the cost of production, and producers must responded by making strategic decisions to curtail production to support higher prices, which we fully explained will happen this year in our Feb 26th Energy Update.
Natural Gas reached this year’s unsustainably low prices due to the very mild 2023/24 winter resulting in Natural Gas inventories ending the Winter heating season 41% above the 5-year moving average. But as expected when producers slowed their production the massive surplus at the end of the winter heating season will virtually be eliminated during this year’s summer cooling season.
As we explained in our May 6th Energy Update although producers responses to low prices was an important factor supporting higher prices, a second factor is more important in supporting higher prices long-term.
Increased exports of Liquified Natural Gas (LNG) and increased Natural Gas pipeline exports to Mexico is projected to move Natural Gas into supply deficits in 2025 and beyond!
To put into perspective how much increased LNG exports overseas and pipeline exports to Mexico will impact our Natural Gas supplies, the Energy Information Administrations (EIA) Short Term Energy Outlook (STEO) has forecasted net exports will increase from 13.6 Bcf/d in 2024 to 16.4 Bcf/d in 2025.
If the EIA’s forecast is correct the net result would be our net exports would increase more than 1,000 Bcf/d in 2025, and our supply surplus in 2024 will become a supply deficit in 2025 and support higher Natural Gas prices not only in 2025, but longer term.
In a recent report, the EIA revealed North American liquefied Natural Gas (LNG) export capacity is on track to more than double between 2024 and 2028, from 11.4 billion cubic feet per day (Bcf/d) in 2023 to 24.4 Bcf/d in 2028, if projects currently under construction begin operations as planned.
The EIA says the price increases forecasted for 2025 will reflect U.S. Natural Gas production will not keep pace with growth in U.S. liquefied Natural Gas (LNG) exports and increased pipeline exports to Mexico They expect the Henry Hub spot price will rise from an average price of $2.20 per MMBtu in 2024 to an average price of $3.10 per MMBtu next year, and increase of 41%.
Our concern here at Energy Professionals is the EIA’s estimated higher Natural Gas prices for 2025 may not be a short-term event, but portend higher prices longer-term.
A New York Times article earlier this year that you can access in the following link explained that something unusual is happening in America. Demand for electricity, which has stayed largely flat for two decades, has begun to surge.
“Over the past year, electric utilities have nearly doubled their forecasts of how much additional power they’ll need by 2028 as they confront an unexpected explosion in the number of data centers, an abrupt resurgence in manufacturing driven by new federal laws, and millions of electric vehicles being plugged in. Many power companies are already struggling to keep the lights on, especially during extreme weather, and say the strain on grids will only increase.”
Further evidence the New York Times concerns are coming to past is on July 30th, the PJM announced the results of their 2025/2026 Base Residual Auction, which you can access in the following link. The report revealed that the cost of Capacity will increase in most zones from $28.92 to $269.92 $/MW-Day, which will increase the cost of Electricity by more than 2 cents per kWh starting in June 2025.
Capacity is the 2nd largest component of the cost of Electricity, but you can keep your cost as low as possible as we explained earlier by reserving long-term agreements while the largest component of the cost of Electricity is near its lowest price since 2000.
Potential supply/demand imbalances forecasted through 2028 increase the risk of higher prices, therefore, we recommend anyone with Natural Gas and Electricity agreements expiring through 2025, reserve power long-term to be available when their present agreements expire.
Not every client’s risk tolerance and hedging strategy are the same, but hopefully, today’s report will help put into perspective your risk/reward opportunities. We invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
Ray Franklin
Energy Professionals
Senior Commodity Analyst
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