Webinar Analysts: Maximum Operating Temperature, Natural Gas Fundamentals and Economic Outlook
During the July Constellation monthly Energy Market Intelligence Webinar, the commodities management group (CMG) team covered the summer/fall forecast, shared their latest sights on economic and inflation risks, gas and power market fundamentals, and pricing trends.
Chief Meteorologist Dave Ryan spoke about the ongoing high temperatures around the U.S. The national heat pattern is tracking close to 2011 and 2012 summers and, so far, is the hottest summer since 2018. There has been little change in the drought conditions: 90% of the U.S. is in drought and 10% of the U.S. is in severe drought.
With the high temperatures across the U.S. and a well-established drought in the West, wildfires have already started, and the hurricane season is expected to be active. The hurricane season officially runs June 1 to November 30, but late August and September are its peak. This year is projected by NOAA to have roughly 20 named tropical storms and 3-6 major hurricanes.
Dave noted that the seasons have been lagging the last 10 years: winter stays longer, spring starts later, summer lasts into September, and the weather is hotter in the fall.
All Things Economic
Chief Economist Ed Fortunato said this is an atypical recession but the current 9.1% inflation rate makes it so. The Fed is preparing another 0.75% rate increase this week ahead of the release of second quarter GDP, which could come in negative at -1.6%. Many indicators suggest a recession is likely, but the keys remain job growth and consumer spending. The slowdown in economic output may be non-conforming as conditions deviate from normal and the Russia/Ukraine conflict persists.
Supply & Demand Fundamentals
The CMG team mentioned that forward natural gas is a key contributor to forward power prices and they generally move in lockstep together, meaning there’s a +95% correlation between natural gas and power. If there is less natural gas and demand is high, forward power will rise to reflect the higher fuel costs. The CMG team applied this theory to five regions – PJM, ISONE, ERCOT, NYISO and CAISO- and the natural gas and power prices are moving together.
Production & Storage
The CMG team also discussed the increases in production or lack thereof, which is the biggest signal the markets have been looking for to return to normal storage levels. Storage is pretty supportive of the current environment.
Currently, gas fired generation outshines coal fired. Over the past year, 34 coal plants have been retired in the U.S. which takes 13GW of capacity from the national grid. The European crisis is driving demand for U.S. coal and the price of coal is very high, thus making higher priced natural gas still competitive. When compared to 10 years ago, there is much less coal generation capacity that can displace gas fired generation.
The EIA’s July Short-Term Energy Outlook (STEO) estimates end of October storage at ~ 3.5 Tcf. The CMG team said the storage deficit for year-over-year narrowed from -16% on June 3 to -10% last week. The longer production stalls at the current 96 Bcf/d level, the more doubt the market will have about being able to make 3.5 Tcf by the end of the injection season.
The CMG team concluded the webinar by leaning on a little poker strategy to illustrate different purchasing strategies around the possible scenarios of weather, production, storage, exports, and the economy that could play out the balance of the year.
We invite you to join us for our next Energy Market Intel Webinar on Wednesday, September 21 at 2pm 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.