Energy markets are volatile, as prices hit their highest levels since the months preceding the 2008 financial crisis. COVID-19 lockdowns have wreaked havoc on all aspects of global supply chains, and the all-time low hydrocarbon prices of 2020 led to a lack of investment in new supply, leading us to this situation. The risk of extreme pricing for all energy commodities is present, and an energy strategy is needed for all businesses with exposure.
Pricing
- NYMEX Natural Gas market have moved above $6.00/ MMBtu for only the 5th time in 13 years.
- WTI Oil prices have moved above $75 for the first time since 2014.
- Asian and European natural gas prices have moved up to $25-$30/MMBtu (after trading near $3.00/MMBtu in 2020), as fear of Winter shortages abounds.
- Coal prices are moving higher as the demand for the natural gas substitute increases, especially in China.
- Regional Electricity prices are 50-100% higher than last year, as natural gas and coal account for over 60% of generation fuel.
Fundamentals
- This summer finished in the top five warmest all time, increasing the demand for these commodities.
- U.S. Natural Gas storage will likely finish 200 BCF (5.4%) below the 5-Year Average at 3.5 TCF. European and Asian storage levels are faring far worse, trending 200 BCF below their 5-Year minimum levels.
- Liquified Natural Gas has been a main catalyst for increased prices, with exports near 11 BCF/D, or 12% of the total U.S. supply.
- Natural Gas production growth remains stagnant, even as high prices signal producers to grow supply.
- Global hydroelectric power is lower than expected, increasing power prices and demand for natural gas.
- Oil prices will rise as COVID-19 cases fall, and its value as an industrial substitute for energy increases.
In all, it is difficult to justify the run up in energy prices from a fundamental point of view. We have seen similar supply/demand levels in recent years but never this level of fear. Global prices have never been higher and are likely the largest culprit for this run-up. Volatility is high and future expectations are that energy prices could fall with a warm winter. Prices could also go upwards to all-time highs if colder-than-normal weather appears. Choice! Energy Management has discussed this topic at length with clients, and with free reports and blogs linked below. Please reach out to Info@ChoiceEnergyMgt.com or a Choice! consultant today to discuss your positions and form an energy strategy.
Choice! Content:
The Choice Blog: Risky Business a New Era in Energy
Bulls and Bears Report (Monthly Natural Gas Analysis)
Weekly Market Update Report (Weekly Natural Gas Analysis)
ERCOT Market Update Report (Monthly Power Analysis)
Suggested Articles:
Reuters: Fuel Pumps Run Dry in British Cities
Reuters: China Energy Crunch Triggers Shutdowns
RBN Energy: Rising LNG Exports Hitch to Soaring Global Prices
Reuters: UK Energy Firms Seek State Support to Weather Gas Crisis
Yahoo: The Dangerous Rally in Natural Gas Prices
Bloomberg: Europe’s Energy Crisis is about to go Global as Gas Prices Soar
-Chris Amstutz, Choice! Energy Management, Risk Management Associate
