Should You Delay Securing Your Next Natural Gas and Electricity Agreement Until After the 2024 Election?
Energy News Update: Aug 20th, 2024 Should You Delay Securing Your Next Natural Gas and Electricity Agreement Until After the
Energy News Update: Aug 20th, 2024 Should You Delay Securing Your Next Natural Gas and Electricity Agreement Until After the
Energy News Update: Aug 20th, 2024
In our August 5th Energy Update, we explained why the recent PJM Capacity Auction will increase the cost of Electricity not only within the PJM footprint, but portends increases in other Regional Transmission Organizations (RTO) as well.
The PJM is the largest RTO in America and they warned in their Feb 24, 2023 report Capacity’s supply/demand balance was tightening, which could lead to higher Capacity prices, and their concerns were confirmed by skyrocketing increases in Capacity in the PJM’s most recent 2025/2026 Base Residual Auction on July 29th.
As a consumer of Electricity there is little you can do about the Capacity increases imbedded in your cost of Electricity, but as a consumer of Electricity in a deregulated state, you can mitigate the effects of the increases by reserving Electricity while Natural Gas, the largest source of power for the generation of Electricity is near its lowest price since 2000.
Therefore, we recommend securing long-term agreements when your present agreements expire. Capacity is the 2nd largest component of the cost of Electricity, but you can keep your cost as low as possible by reserving long-term agreements while the largest component of the cost of Electricity is near its lowest price since 2000.
We don’t recommend you delay securing your next Natural Gas and Electricity agreement until after the election, believing a change in administration could lead to more favorable fossil fuel policies. Regardless which party is in control Natural Gas prices are at unsustainably low-price levels:
As you can see from the above chart, since 2000, when Natural Gas declined to where it is today, it always preceded Cyclical Bull markets that trended higher 2 to 4 years, and they were always triggered by unsustainably low prices.
Prices are unsustainably low when they are below the cost of production, and producers will always respond by curtailing production to support higher prices longer term.
And in our May 20th Energy Update, we said another, even more powerful factor would likely force Natural Gas into supply deficits in 2025 and support higher Natural Gas prices through 2028!
Our continued growth in Liquified Natural Gas exports since 2016 overseas and pipeline growth, mainly to Mexico.
In our July 29th Energy Update, we gave a detailed explanation of why we may be in the early stages of a Secular Bull Market, which could last for many years. We explained that Natural Gas is still by far the largest source of power for the generation of Electricity in America and will remain so for at least the next 5 to 10 years.
And although an administration more favorable to the fossil fuel industry could impact the start of a Secular Bull Market, we believe based on the fact that prices are presently below the cost of production and America’s Natural Gas exports are expected to continue increasing for the foreseeable future, we are likely in the early stages of a Cyclical Bull market that will trend higher for at least 2 to 4 years.
Therefore, regardless who wins the next election, we recommend anyone with agreements expiring within the next 18 months take advantage of today’s very low Natural Gas rates, which will likely be higher than where their rates are expected to be at least through 2025.
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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