Infinity Insights - Volume 14, Issue 4
MONTHLY UPDATE - APRIL 2024 EDITION
NATURAL GAS
NYMEX Natural Gas has settled to the $1.78 range with the most recent EIA Weekly Natural Gas Storage Report showing a net injection of 50 Bcf week over week, slightly firming prices with consensus estimate at 54 Bcf.
Year to date US natural gas rig counts have fallen from 118 to 106. Decrease is due to low natural gas prices. For example, spot natural gas in the Permian Basin has been trading negative for much of April.
Spot month natural gas has support at $1.60 with resistance at $2.25.
Calendar year 2024 finds support at $1.52 with resistance at $3.55. Calendar year 2025 has support at $3.00 with resistance at $4.35, in-line versus prior month.
EIA’s Short-Term Energy Outlook (4/9) stated Henry Hub average spot price is expected to remain below $2.00/MMBtu in 2Q2024 citing strong inventories. That being said, the report also notes the spring injection season is expected to be lighter than normal which should result in inventories regressing towards the mean – winter withdrawal season ended with 39% more natural gas in storage versus the 5-year average.
WEATHER
Short-term weather outlook presents a warmer than normal end to spring, approaching what is anticipated to be a hot summer.
Summer 2024 outlook remains exceptionally hot. Globally, March of this year was the hottest March in NOAA’s 175-years of data. Looking forward to Jun/July/August we don’t see much relief. Sea surface temperatures are shattering records too. North Atlantic sea surface temperature is 20.9°C, .3°C greater than the prior record set for this time of year in 2023.
North Atlantic sea surface temperature has been a reliable indicator for forecasting tropical weather activity.
Tropical Storm Risk hurricane season forecasted activity ticked up, expecting 23 named storms, 11 hurricanes, and 5 major hurricanes. Forecasted events to make landfall include 5 named storms and 3 hurricanes. This is particularly concerning for energy markets as the US Gulf Coast accounts for 47% and 51% of US petroleum and natural gas processing capacity, respectively.
There are currently no tropical developments of note. We will continue keeping you up to date on this.
MARKET NEWS
ERCOT Regional Transition Plan (Power)
A quick note here on Energy vs. Power. Energy is a measure of volume of electricity, whereas power is a measure of flow of electricity. Think of this in terms of a hose filling a bucket of water. The water flowing thru the hose to fill the bucket is power. The total volume of water in the bucket is energy. Two very different concepts but equally important.
ERCOT’s latest Regional Transmission Planning Report has been released. The forecasted peak generation is projected to increase on average 1.2% annually thru 2030. In contrast, forecasted demand increases at a rate of 1.6% annually for the same time period. With the most recent projections supply is converging closer towards demand, meaning operating margins will be reduced. Grid operation will have to improve to facilitate the converging supply and demand. Improvements can and should be achieved through programs such as demand response, onsite generation, enhanced time of use programs, new generation, and battery storage.
The energy (vs. power) forecast is a bit different. Total energy generation is expected to grow at approximately 2.95% annually. The energy forecast exceeding the power forecast makes sense as we take a closer look at what is driving the increase in energy needs. As a baseline, Texas’ population growth averages about 1.5% annually and is likely to increase further. The bulk of the growth in the Texas load is coming from data centers and vehicle electrification. This is important because these loads can be curtailed in times of scarcity. In the case for data centers, crypto-currency miners have cooperated and halted operation when grid operators have requested so. On the other hand, a more conscious consumer can plug in their EV without charging and set the vehicle to charge according to “green charging” guidelines. You may be familiar with “green charging” with your cell phone. If you charge your phone in the early evening the phone (if enabled) will sit there until later in the evening when wind energy is abundant and demand is low and only begin charging then. This is the crux of the power market: time of use. There’s a lot of low hanging fruit out there as far as improving time of use for power. For instance, simply not running appliances during peak scarcity hours helps the grid tremendously. Additionally, on the commercial side, adjusting manufacturing shifts accordingly, or adjusting cold storage refrigeration schedules to match a “green” schedule will further enhance the grid’s resilience.
Our take: Texas innovation will make this growth manageable, but with a reduction in overall operating margins we expect an increase in real-time pricing volatility.
Bidirectional EV Charging Pipeline
Bidirectional EV charging is a concept where electric vehicles can integrate into the grid to consume or dispatch power. Bidirectional charging can be used to power a local building or home – vehicle to building (V2B) or power can be transmitted to the grid (V2G). Advantages of implementing V2B bidirectional charge include on-site generation redundancy, and mobile power sources for back-up generation. V2G bidirectional charging could massively improve demand response’s impact on grid stability and could prove to be quite lucrative to owners who assist in powering the grid in times of scarcity. The concept is gaining traction. April 4th the Maryland House of Delegates passed a bill requiring utilities to expedite bidirectional EV charging implementation. The bill known as the DRIVE Act (Distributed Renewable Integration and Vehicle Electrification Act) will require utilities to provide vehicle-to-grid charging plans by April 2025 and virtual power plants (VPP) plans by July 2025. California introduced a bill, SB-233 in January which would have required all new EV production to include bidirectional charging. The bill was voted down, citing the additional cost of EV’s with the required equipment. What’s left of the bill is legislature requiring further studies on bidirectional charging.
Currently, only a handful of EV’s are equipped with bidirectional charging hardware and software. These include the Ford F-150 Lightning, Hyundai Ioniq 5, Kia EV6, Nissan Leaf, and Kia Niro EV. Unfortunately, the EV market leader, Tesla, does not current allow for bidirectional charging and will actually void warrantees if current changes direction. Tesla confirmed by 2025 all models will support bidirectional charging and GM announced model year 2026 EV’s will come standard with bidirectional tech.
Our take: although EV adoption has slowed in recent years, we believe the adoption will continue as technology and benefits improve. The US is projected to have 4.6 million electric vehicles in service by 2030. Bidirectional charging is a useful technology and a great complement to the intermittent renewables transition. Once the infrastructure is built out (heavy lifting to be done), participants can contribute to grid stability by either powering their homes & buildings or sending power back to the grid, either avoiding using power or being rewarded as a virtual power plant (VPP), sending power to the grid. This can be lucrative to homeowners and business owners, in addition, if a homeowner is considering the purchase of a backup generator they could hypothetically provide site resilience by participating in V2B bidirectional charging.
GEOPOLITICS
Middle East
Saturday, April 13 Iran launched an aerial attack on Israel, launching approximately 170 drones, 120 ballistic missiles, and 30 cruise missiles of which the vast majority were intercepted and destroyed. Since the attack Israel has had a limited retaliation focusing on Iranian military infrastructure and nuclear facilities. Iran claims the attacks were neutralized but satellite imagery shows otherwise.
Situation in Gaza remains highly contentious with Israeli forces entering Rafah. Israel claims they need to enter Rafah in order to neutralize Hamas militants and influence in the region. Hamas has warned of a dire humanitarian situation if Israel attacks Rafah.
Our take: interestingly, with things heating up in the Middle East such as Iran’s direct involvement with Israel and tensions in Gaza escalating, we have not seen major moves in commodities. We would expect to see a flight to safety with appreciation in precious metals, creating upward pressure on prices.
Furthermore, because of the Middle East’s large influence on energy markets, we would expect to see increases in energy, specifically crude oil prices. Because of the limited impact on world commodity prices we are cautiously optimistic that speculators believe the conflict between Iran and Israel may be limited to what has already transpired and could have already peaked.
Europe
The Russian Ukraine War continues. US recently passed a $61bn aid package in support of Ukraine’s war effort. Funds are likely to help replenish depleted stocks of weapons and ammunition and provide air defense systems, mid to long-range missiles and artillery shells. Package will certainly help Ukraine.
Russian Foreign Minister, Sergey Lavrov stated “Westerners are dangerously balancing on the brink of a direct military clash between nuclear power, which is fraught with catastrophic consequences”. Unfortunately, it appears this war is not just lingering on but possibly escalating.
Global natural gas prices ($/MMBtu):
Henry Hub (USA): $1.76
NBP (UK): $10.11
TTF (Dutch) $10.10
JKM (Japan/Korea) $10.88