March Market Insights: Bank Failures, Production Flattens, RPS/REC Updates

Article by Constellation

Constellation is your source for analysis into all factors influencing the energy market. Recently, Constellation’s Commodities Management Group provided some key insights into weather, economic, natural gas and purchasing fundamentals that are important to your energy purchasing strategy.

Weather Outlook

The short-term weather outlook is looking more seasonable as the colder air continues to dominate the western half of the nation as the eastern half is forecast to see more of a back-and-forth weather pattern throughout the second half of the month.

A colder-leaning and stormy pattern will continue to be seen across the West, especially across California in the short term where additional snowpack increases will be seen in what has been a record-challenging winter. Chillier temperatures are forecasted to linger toward the end of the month as the East likely sees a more variable pattern.

All Things Economic

According to the Wall Street Journal and CNBC, after a scorching January report, February non-farm payrolls chilled slightly but still added 311k jobs while unemployment nudged up from 3.4 to 3.6%. Both indexes surpassed expectations of 225k and 3.4% while average hourly earnings climbed 4.6% YoY slightly below the 4.8% expected, some good news for inflation. The market’s initial reaction is that the Fed would need to continue raising rates.

In other economic news, last week, the U.S. saw the biggest bank failure since 2008 when regulators closed Silicon Valley Bank (SVB). A bank run on deposits unfolded as key venture capital firms appear to have advised mostly technology start-up clients to their pull money. This led to a record $42 billion dollars in attempted withdrawals last Friday. SVB’s downfall began with an inflow of approximately $130 billion from Q1 2020 thru December 2022.  SVB received the deposits from over half of the IPOs in 2022 making it the 16^th largest U.S.  bank. A large majority of these funds went into long-dated Treasuries and 10-year mortgage notes.  Approximately 80% of SVB’s deposits were uninsured because they were above the FDIC threshold of $250K. The Fed’s actions of aggressive rate tightening over the past year led to unrealized losses to

Drawdowns and Flatlines

The EIA reported an 84 Bcf withdrawal from last year for same week-ending March 3, which fell right in line with consensus, while undershooting (again) last year’s 101 Bcf and the 5-year (2018–2022) average of 126 Bcf reflecting late February mildness in the eastern U.S. At that same time, underground stock had a positive spread to historicals sitting at an eye-opening 32% and 22%, respectively. As inventories pare down at a sluggish pace, the EIA has adjusted its end-of-season forecast higher, now 2,187 Bcf vs. 2,073 Bcf from its February Short-Term Energy Outlook. More seasonable cooler March temps for most of the country should limit any historically low pulls for the next few weeks in addition to the full return of the Freeport LNG terminal. Nonetheless, it will likely take a mild summer of below-average cooling demand or lower production to significantly cut into the storage surplus. Don’t look for these fundamental drivers to change in the short-term.

Production has remained overall steady near 100 Bcf/d so far this winter but outlook remains a bit more uncertain for the balance of 2023 as producer financial discipline coupled with lower producer profitability from decreased prices now must be reflected in the forecasts. Producers stated in 2022 Q4 earnings calls that they would operate within cash flow levels this year.

National RECs Gain Footing

National wind RECs have found some footing in the $4-5/MWh range, and low commodity/power prices could mean more spend for renewables/RECs creating upward pressure. Renewable project hurdles to completion could keep REC supply limited in the near-term. Alternative Compliance Payments (penalties) are tied to inflation, so prices have a bullish bias in an undersupplied market.

Have We Hit the Bottom?

Most regional power and natural gas forward strips hit 9-month lows in late February. These drops amounted to anywhere from a 20% to 30% decrease from their 2022 peak, while prompt month gas saw a 78% plunge from its August 2022 high of $9.68/MMBtu. Since those February lows, we’ve seen some narrow-range volatility as forecasts of a more seasonable and cooler March/spring have emerged prompting those lows to tick back higher by about 7%. What this higher recent pricing action might be showing us is an established bottom for the near future. So where do we go from here? Below are 4 factors to consider.

• Historically, when we’ve seen mild winters, there seem to be buying opportunities in the first quarter (see graphic below for the past 5 years). As prices have moved higher following the ebbs and flows of recent colder temperature outlooks, we could be seeing the same pattern materialize this year. This would lend itself to buyers looking to capitalize on these trends now, before prices run up higher.
• That said, with underground storage recently at a robust 32% above last year and 22% above the 5-year average, we could expect some level of higher price resistance in the near-term.
• For buyers hoping for even better pricing in the spring than the late February lows, there’s likely not as much downside potential given the already lower price environment we are in.
• In some cases, we’ve seen better “bang for your buck” opportunities during the summer/winter (than the shoulder months), if milder weather materializes. So those waiting/hoping for lower prices may have to bank on a cooler summer, which in the past 10 years of impactful climate change has been more of a rarity. (Summer outlooks will publish in the April/May timeframe.)

For more insights like this, we invite you to join us for Energy Market Intel’s return webinar on Wednesday, April 19 at 2 pm EST, where Constellation energy experts offer detailed and timely 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.

1. Sources: The Wall Street Journal, Graham Stephan and the FDIC