Webinar Analysts: A La Niña Winter, Long-Term Inflation and New England Winter Risks
During Constellation’s October 2021 Energy Market Intel Webinar, Constellation market experts provided a detailed look at a La Niña winter and its impact to our Weather Desk’s winter outlook, how both domestic and international energy markets could be making the current transitory inflation period more permanent, a review of natural gas fundamentals, and the link to a global fuel shortage and winter New England energy prices. Finally, three distinct buying period scenarios within the next 6 months were discussed as each were given a buy, sell or hold endorsement.
Winter Outlook
Webinar resident and Constellation’s chief meteorologist, Dave Ryan, discussed a rapidly building La Niña conditions in the South Pacific as temperatures are currently 0.8 degrees Celsius below average, classifying it as “weak”. A weak La Niña has shaped Constellation’s Weather Desk team’s winter outlook, consisting of a variable jet stream moving Southeast from the Pacific Northwest and swooping up to the Northeast in the Upper Plains/Midwest. Regions north of the jet stream are more susceptible to colder-than-average temperatures with a better chance for a connection with colder Canadian air, while those in the jet stream could see variable temperatures netting out to “average”. The tier lying south of the jet stream have the best probabilities to see dry and above-average temperatures. All-in-all on a national level, the winter is expected to come in between the 30 and 10-year averages with a slightly colder bias, especially if blocking is introduced into the picture.
Inflation Pivoting Away from Temporary
Another webinar regular who brought his breadth and depth of knowledge to the call was Exelon Chief Economist, Ed Fortunato. Ed briefed the audience on the increasing energy prices as well as elevated price index. The consequences of these rising energy prices could lead to a longer-term inflationary period, which could thwart a recovering, yet tenuous post-COVID economy. Shrinking disposable income along with lower discretionary spending would be the most detrimental impacts to a longer lasting inflationary period.
Storage, Production, and Export Update
Underground natural gas storage was deemed “adequate” with levels only 13 and 5% below last year and the 5-year average, respectively. Strong injections over the past 5 weeks have turned this from a bullish fundamental to a neutral price driver. Dry natural gas production for 2022 is expected to rise to 95.4 Bcf/day per the EIA up ~3 Bcf/day from the expected 2021 average of 92.1 Bcf/day. A breakdown of producing regions and longer-term forecasts for production were then discussed evaluating particular regional infrastructure and each one’s ability to facilitate more growth based on pipeline capacity. Finally, export growth, both Mexican and liquefied natural gas (LNG), was reviewed and how each driver’s growth could produce further tightness on the market absent of incremental production increases.
Global Natural Gas Prices Ripple to New England Winter Risks
Constellation’s Commodities Management Group’s (CMG) Brandon Fong took a look at the global energy markets and the growing concerns of a fuel shortage in both Europe and Asia this winter. With both user groups highly dependent on LNG for supply, LNG prices have ratcheted up from under $2/MMBtu in the summer of 2020 to current levels above $30. Steady Asian demand for LNG cargoes, below-average European inventories, record high carbon allowance prices, and low coal stockpiles in Asia and India were cited as a few of the many drivers pushing prices higher.
New England infrastructure constraints make elevated global LNG prices a primary driver of winter gas prices in the region. LNG imports serve as a supplement to dry gas from pipelines when temperatures drop, and gas demand picks up. As such, for the region to incentivize “on-demand” LNG cargoes it must match or surpass global prices at $30/MMBtu. This dynamic appears to be supporting such high forward gas and power prices in New England, and to a lesser extent, downstate New York. Fuel logistics including LNG cargo delivery lead time, oil generation reliability, inventories and deliveries could add an additional layer of risk to energy in New England this winter and those with open load on the wholesale power market should evaluate these risks in their energy procurement strategy.
CMG covered the natural gas market pricing action as the prompt-month natural gas futures contract has retraced from its high in early October at $6.40/MMBtu and has now consolidated around $5. Value from a backward dated curve shows the 5-year forward price at $3.53/MMBtu at the rough equivalent of the inflation-adjusted 10-year historical average price for natural gas at $3.00/MMBtu. The webinar closed with some buying scenarios based on the current state of fundamentals and different realized weather outcomes.
We invite you to join us for our next Energy Market Intel Webinar 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.