Webinar Analysts: A Hot Summer, Volatile Economy, and Natural Gas Fundamentals
During the May 2022 Constellation monthly Energy Market Intelligence webinar, the commodities management group (CMG) team covered the summer forecast, their latest on economic and inflation risks, gas and power market fundamentals and pricing trends.
Chief Meteorologist, Dave Ryan, spoke to the drought that is persistent through much of the western United States, not just California and the desert southwest, but the broader western region.
Drought through much of the west, coupled with a weak El Niño upper atmospheric condition, is a recipe for what could potentially be a top-five hottest summer since 1950. The summer weather outlook continues to be bullish of natural gas. A break to a cooler solution would place some downward pressure on gas and power prices.
Chief Economist Ed Fortunato mentioned that the economy has been extremely volatile, interest rates are increasing, sales of new homes are down 16+% in April from March (according to a joint report from the US Department of Housing and Urban Development and the US Census Bureau), inflation is running hot, and there are multiple supply chain issues. On the other hand, employment is strong, first-time claims for unemployment benefits are at a 50-year-low, and orders for durable goods are relatively strong.
U.S. equites have sold sharply during the past two months amidst rising concerns over a possible recession that may extend beyond the U.S. China continues to be in lockdown, the European Union economy is near zero growth, and the U.S. economy posted negative growth in the first quarter. U.S. consumers are still spending; “soft landing or recession,” is in the balance for the Federal Reserve.
Natural Gas Fundamentals
The overarching theme of the May 2022 webinar was “worse before better,” and that seems to be spot on. The natural gas market is viewed as “bullish until further notice” and volatility appears to be setting the tone that the highs will be high, and the lows will be high. Pullbacks may be short-lived.
Through the noise, the biggest signal that the gas market is looking for is a measured and sustained response by producers to increase output. The EIA and other third parties are forecasting natural gas production to increase from the current 94 billion cubic feet (bcf) per day to 98 or 99 bcf per day by year’s end. Gas production has largely been flat through this year and demand has been robust. The current supply/demand balance is tight, and prices have responded to the upside.
The continued bullish scenario largely involves a very hot summer (strong power-generation demand), lagging production, and lower-than average storage injections coupled with strong exports. A significant break to the cooler side relative to weather, coupled with a strong producer response to higher prices, and a softening economy, round out the case for softening natural gas prices going forward.
Power prices are much elevated with gas prices. A hot start to summer in ERCOT and limited hydro output in California are viewed as exacerbating the pricing action to the upside in these markets. The upward price action is not confined to these regions however, as every ISO is understood to be subject to the effects of high gas and coal pricing.
Please join us on Wednesday, June 15th, at 2 p.m. ET, where we provide updates on factors affecting energy prices, such as weather, gas storage and production, and domestic and global economic conditions.
Register by visiting www.constellation.com/marketintelwebinar.