As Gas Production Continues to be Muted and Summer Gets Hotter, Energy Prices Could Rise
During our monthly Constellation Energy Market Intel Webinar, our market analysts took a deeper dive into key energy market drivers and events that affect energy consumers.
Constellation’s meteorologist, Colin Eberwein, kicked off the webinar with the weather outlook focusing on the remainder of July and the outlook for August. Chief Economist Ed Fortunato offered analysis on money supply and the potential for inflation, and several market analysts delved into the role of gas and oil producer discipline keeping gas supply in check, as well as power pricing in California and PJM.
The near-term outlook for the second half of July calls for continued record heat in the West while the Southeast continues to come in “below normal” as more than adequate precipitation in that region has largely kept temperatures down. The upper Midwest is seeing some cooler air while the lower Midwest is a bit hotter than normal. The East Coast remains seasonal with plenty of precipitation to keep things from going above normal. For August, the weather models are mixed; The American model is warmer than normal while the European is “normal.”
Ed Fortunato spent some time reviewing the growth of the money supply and how this may or may not portend for longer-term inflation. Fortunato is of the view that although the money supply has seen explosive growth as the Federal Reserve (aka Fed, The Fed) has pumped money into the economy in response to the pandemic, the inflationary effect will be short-lived. There are several divergent views on this idea and some growing concern that continued Federal Reserve stimulus in the teeth of robust economic growth could bring longer-term inflation to the fore.
Natural Gas and Oil Update
Natural gas and oil prices are 70-80 percent higher than a year ago. However, the amount of gas produced today is lower than a year ago and oil production has been flat for many months. Oil and gas producers collectively lost $300 billion during the past decade on their investments in shale energy. Additionally, many gas and oil producers had borrowed large sums of money, further boosting production and reducing cash flow and earnings.
However, a shift is well underway where producers are not inclined to overproduce and instead are cutting costs, cutting capital expenditures, improving free cash flow, paying down debt, and returning earnings to shareholders. The result of this is a “muted” amount of new gas and oil supply coming to market relative to what are relatively higher prices. This trend is expected to continue for the longer term.
Regional Power Update
Electric power prices in California are up substantially. Record high temperatures in California and the entire Pacific Northwest region are driving lots of demand. The high temperatures are also a bit different than past heat waves in the region as the heat is quite close to the most densely populated areas close to the Pacific Coast. The drought in California has drawn hydroelectric dam inventories to very low levels stressing other sources of power generation in the state and elevating prices. The outlook for a good winter snowpack season to replenish water levels for next spring is by no means probable and the elevated power prices currently in the market may have a longer life cycle as a result.
Electric power demand in PJM was at or near record levels for the month of June. July temperatures moderated a bit and demand for power eased. As natural gas prices have been grinding upward through the summer, power prices in PJM have been moving up as well. Coal prices have also risen during the past several months, and this has been elevating the overall price floor for electric power in the region.
Our next webinar will occur on Sept. 15, 2021, where we continue to offer detailed and timely updates related to the energy market, economy and weather, and much more. Register by visiting www.constellation.com/marketintelwebinar.