Hot Summer, Record Exports & Reopening Economy Support Q3 Power & Gas Markets3 min read
In the June 2021 Energy Market Intel Webinar, Constellation market analysts featured a detailed look at the summer weather forecast, the U.S. economy with particular emphasis on the outlook for inflation, natural gas market fundamentals, a review of the PJM auction, pricing action in ERCOT and California, and finished with a “Tomato Club” progress report.
Constellation’s Chief Meteorologist Dave Ryan kicked things off with the national summer forecast. Ryan said that summer 2021 could be in the top-five all-time hottest category and possibly the hottest summer on record. The summer weather pattern is heavily influenced by severe drought in the West and Southwest that, according to Ryan’s forecast, will not be ameliorated anytime soon. The heat in the West is moving to Texas and beginning to dry out the moisture that had been accrued in late spring, bringing temperatures in key Texas cities to “above normal,” which is expected to drive power and gas demand in the region. The outlook for the Northeast and I-95 corridor is also for above-normal temperatures that are resultant from the upper atmospheric condition related to extreme drought in the western U.S. Overall, a bullish scenario is developing for power and gas demand through the coming summer.
Ed Fortunato, Constellation’s chief economist, dove right into the hottest topic relative to the economy, that being inflation. The headlines and business channels have been focused on rising wholesale prices across the commodities and retail sectors spilling over into food, lodging, housing and other sectors. The key discussion related to whether the inflation spike is temporary or reflective of a longer-term trend. Federal Reserve Chairman Jerome Powell repeated that the expectation at the nation’s central bank is that the current inflation is transitory and will recede relatively quickly. Fortunato noted that some of the most talked about price spikes; for example, lumber prices have already moved down from recent highs and that the supply chains are ramping up to meet demand. Some of the market analysts countered the view that inflation is a short-term event, noting that the money supply has grown at a record level during the past 14 months and there is a lot of cash that may be hard to mop up quickly.
Production and Storage Update
The Commodities Management Group (CMG0 then moved into natural gas market fundamentals with a month-over-month review of where production, storage, exports and prices have moved since May. Natural gas production is mostly flat for the year at 91.5 Bcf per day, and if that level of production holds, the CMG team views this as supportive of pricing action in the second half of the year. Natural gas storage continues to lag the five-year-average, albeit only slightly, and the Energy Information Agency (EIA) is forecasting 3.6 trillion cubic feet (Tcf) in inventory at the end of the gas injection season, viewed as supportive of pricing action through the summer.
Liquified natural gas (LNG) exports, after a brief respite pursuant to scheduled maintenance, are back on track to nearing full capacity. Asian and European LNG index prices are more than high enough through the second half of 2021 to support a record amount of U.S. LNG exports for the rest of this year. High exports of LNG and pipeline deliveries to Mexico are very supportive of the natural gas market in the second half of this year.
The PJM capacity auction saw average capacity prices come in at $50 per megawatt hour, significantly lower than expected. There were higher prices for capacity in PJM in load pockets where transmission is constrained, but overall, the expectation for the average price was closer to $100 rather than $50. There is an expectation that a considerable amount of coal-fired generating assets will be retired in PJM in the mid-term and that renewable generation sources will continue to take an increasing market share in the largest ISO in the United States.
The team reviewed factors impacting electric power prices in ERCOT and the California ISO (CAISO). As ERCOT continues to add renewable supply, the grid could be subject to tight reserve margins when wind conditions are low and forced outages of thermal generation leave little surplus available to meet strong cooling demand. Regarding CAISO, CMG analyst Greg Kosier added that recent summer-like conditions have brought all the traditional mid-summer concerns like resource adequacy, hydro conditions, wildfires and late-day imports to the forefront in the state.
Lastly, the team featured some pictures and commentary relative to some tomato growers who are part of Constellation’s “Tomato Club. It’s not too late to join the “Tomato Club”. Continue to share your tomato growing photos to CMG@Constellation.com to be featured in next month’s webinar.
Next month’s webinar will occur on July 21st at 2 p.m. ET, 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.