Webinar Analysts: Summer Outlook, Supply & Demand and Purchasing Strategies
During Constellation’s April Energy Market Webinar, the Commodities Management Group (CMG) featured the outlook for summer weather, an overview of the economy, followed by natural gas supply and demand fundamentals, and changes in the global outlook that may warrant the attention of energy buyers.
Constellation’s Chief Meteorologist, Dave Ryan, spoke to the spring/summer outlook. The drought has extended from the West – mainly California – into Texas, the Plains and the Rockies. The melting season has already started in California and the seasonal snowpack has dropped below 50% due to early runoff and lack of rainfall. In the Northwest, temperatures have been closer to normal and the Pacific Northwest hydro-power outlook for summer is very close to the thirty-year average. Ohio and the east coast have had sufficient precipitation and no drought is expected. The drought in Texas, however, is starting to appear to rival extreme levels not seen since 2011-2012. Factors are in place for a top 10 hot summer throughout most of the U.S. A hot summer could foster high natural gas demand for electric power generation and could be supportive of the gas market, all other things being equal.
Economic Updates – Global Recession Risks Rising
Constellation Chief Economist Ed Fortunato covered the general state of the economy. One factor that could move the needle on the demand for natural gas and energy is the potential for a global or domestic recession. The definition of a recession is two consecutive quarters of negative GDP.
The German economy posted negative growth to GDP in the fourth quarter of 2021 and Bundesbank forecasts negative GDP for the first quarter of this year. Germany is the largest economy in the European Union and should Q1 growth be negative for Germany, it’s possible the rest of Europe could follow. Additionally, there is growing concern that China’s economy, with one-third of its people in Covid-lock down, is recessionary.
The U.S. economy is viewed as doing better than the EU and China; however, economic growth is slowing. The Atlanta Federal Reserve Bank is forecasting U.S. first quarter growth near 1%, a significant cool-down from the 5.7% average GDP growth of 2021. Employment remains strong, unemployment is low (3.6%) factory utilization is near 78%, and equities prices, having corrected recently, are still much higher than the lows of 2020. However, inflation is running at a 40-year high, real-interest rates are rising, and there is much concern that the Federal Reserve will not be able to manage a “soft landing” for the economy. Economic recession could be bearish of energy prices generally. However, there is also a potential risk that inflation could persist in a recession similar to the 1970s when the term “stagflation,” or inflation combined with negative economic growth, could present itself as well.
Supply & Demand Fundamentals
Keith Poli of the CMG team covered natural gas production noting that much higher prices have not spurred a significant and sustained increase in output. Some smaller private drillers are more actively deploying new capital for drilling while other larger companies appear focused on shareholder value, paying dividends, and reducing debt. The EIA forecasts natural gas production to rise from the current 95 billion cubic feet (bcf) per day to 98 bcf per day by the end of the year. If production does not rise or rises more slowly than forecast, gas prices could be pressured to the upside. If producers exceed expectations and bring on more supply than expected, in response to higher prices, the supply/demand balance could loosen, and prices could ease.
Bulls and Bears
Greg Kosier and the team of Constellation analysts broke down the market in a “bulls and bears” segment pitting divergent pricing scenarios and effects thereto.
From the “bull” side, a hot summer coupled with flat-to-modestly rising production, and sub-par storage injections, could be very supportive of the gas market. A break in the weather to the cooler side coupled with producers exceeding expectations, could pressure pricing to the downside. Additionally, an economic recession could be an agent of downside pressure on energy markets. The team also pointed out the high level of “tail risk,” whereby, a headline event, could move markets quickly up, or down, with extreme volatility potentially making decision-making for end-users very challenging.
The CMG team reviewed the recent pricing action in the market for power and natural gas and discussed risks for the rest of the year and beyond. For businesses that are short of natural gas, the team spoke to the possibility of playing defense in the front by adding some coverage in the near two months diminishing through summer in order to buy time and potentially reduce the effect of near-term volatility on future decision making. The team also discussed the much lower pricing that is available in the deferred NYMEX contracts for 2024 through 2027, putting them into historical pricing context, and noted that end-users may find opportunities in layering in future deliveries at prices that are much discounted to the prompt and near-month contracts.
We invite you to join us for our next Energy Market Intel Webinar on May 18th at 2 p.m. ET where Constellation energy experts continue to offer detailed and timely updates related to the energy market, economy and weather, and much more each month. Register by visiting www.constellation.com/marketintelwebinar.