Energy Markets Update
Weekly natural gas inventories
The U.S. Energy Information Administration reported last week that natural gas in storage decreased by 59 Bcf. There was a withdrawal for the same week last year of 4 Bcf while the five-year average withdrawl was 31 Bcf. Total U.S. natural gas in storage stood at 3,564 Bcf last week, 9.2% less than last year and 2.5% lower than the five-year average for this time of year.
Major Correction in Natural Gas
Natural gas prices have been on a steep decline over the past month. There are a couple important drivers, one being warmer than average winter temperatures but just as important is that prices were already exceedingly frothy and a correction was overdue. On Monday CME NYMEX Henry Hub futures dropped to $3.68/MMBtu which marks a 42% decline since hitting $6.31/MMBtu on October 5th.
Source: CME Group
Following Monday’s dramatic price decrease, on December 7th the U.S. Energy Information Administration lowered its estimates for U.S. natural gas prices in early 2022 after storage injections this fall outpaced the prior five-year average. "We forecast natural gas spot prices at Henry Hub will average $4.58/MMBtu in [first-quarter 2022], compared with a forecast of $5.24/MMBtu in the November [outlook]," the EIA said in its December Short-Term Energy Outlook. "The lower forecast reflects our expectation that U.S. natural gas inventories will finish the withdrawal season at the end of March at a higher level than previously expected." The EIA has also lowered its forecast for fourth-quarter Henry Hub natural gas spot prices by 52 cents to $5.02/MMBtu.
Mild weather during November resulted in lower-than-expected use of gas for space heating, although high global demand for LNG remains steady. The EIA forecasts that inventory draws this winter will be similar to the five-year average, with inventories ending March below 1.7 Tcf, or 2% below the five-year average for that time of year. Despite the current warm weather we have been experiencing across the U.S., analysts still anticipate volatile gas prices due to the fact that weather forecasts can be extremely fickle and the potential for colder shifts in weather forecasts or even further warmer changes are still very much in play for 1Q2022 and even December.
A lot can be said about the price run-up this year and it is a phenomenon that has repeated a number of times over the past 10 years. Ultimately short term fundamentals rule the day and if national storage inventories remain strong, it becomes hard to justify spot prices that reflect panic around supply. The fact that this December is starting off as one of the warmest on record likely made the market collapse all the more dramatic. Nonetheless, the U.S. has its own production and should not be price sensitive to global LNG and other benchmarks that raise real concerns for parts of Europe and Asia. Financial markets and speculation clearly have the potential to exaggerate concerns around fundamentals however, and if capex depletion in the oil and gas exploration sector remains a theme in North American markets, we do see legitimate value in hedging Winter 2022/2023 and potentially beyond.
Regional Carbon Markets Show Strength
The Regional Greenhouse Gas Initiative (RGGI), a CO2 cap and trade scheme with 11 participating Northeastern states, on Friday completed its 54th auction and cleared 27 million allowances at a price of $13 per ton. The auction generated $351.5 million for states to reinvest in carbon abatement programs including state sponsored energy efficiency and renewable energy programs. After trading in a narrow range between $3-8 per ton over most of the past 5 years, RGGI prices have rallied this year alongside many other carbon and renewable energy credit markets. RGGI requires fossil fuel power plants with capacity greater than 25 megawatts to obtain an allowance for each ton of carbon dioxide they emit annually. New Jersey rejoined RGGI last year and Pennsylvania is expected to join as early as next year.
RGGI Allowance Price Trend_vDec2021 (S&P)
The market for voluntary renewable energy credits (RECs) has also rallied over the past year, a function of growth in demand from large corporates and municipalities, as well as a more supportive regulatory environment at the federal level. This has added risk for sustainability program managers who had come to rely on relatively inexpensive national RECs (e.g., Texas Wind) to comply with short term carbon goals. To avoid short term volatility in REC prices, one potential mitigation strategy is to secure longer term contracts through REC offtake or PPAs.
Texas REC Price Trend_v2021 (S&P)
Natural Gas Storage Data
Market Data
Use the filters to sort by region
Market data disclaimer: Data provided in the "Market Data" section is for the newsletter recipient only, and should not be shared with outside parties.
