Infinity Insights - Volume 14, Issue 2
MONTHLY UPDATE - FEBRUARY 2024 EDITION
NATURAL GAS
NYMEX Natural Gas has settled to the $1.77 range after news of Chesapeake Energy cutting natural gas production. The most recent EIA Weekly Natural Gas Storage Report showing a net withdrawal of only 49 Bcf week over week, whereas consensus estimate was a withdrawal of 67 Bcf. Spot Natural Gas has fallen considerably since the beginning of February, about 15%, with weekly inventories coming in in-line or stronger than estimates, coupled with favorable weather.
Spot month natural gas support at $1.60 with resistance at $2.40.
Calendar year 2024 finds support at $1.60 with resistance at $3.60. Calendar year 2025 has support at $2.80 with resistance at $4.10, both down versus prior month.
Natural gas prices remain at historic lows with the most recent weekly inventory report showing supply exceeding the 5-year historic inventory range. This is particularly interesting as we approach the “shoulder months” – entering spring, when, historically, inventories are built up for use in summer. The biggest factors contributing to natural gas softening are mild weather, a favorable weather forecast, robust domestic inventories, and a lack of LNG export capacity.
WEATHER
All signs are pointing to a historically mild winter. Although most of the US experienced extreme cold in mid-January with Winter Storm Heather, the cool Arctic air quickly moved away and mild temperatures prevailed.
Measured by population density and degrees per days where temperatures were less than 65°, and applying the current forecast, NOAA is forecasting the mildest winter for the lower 48 states since this data was tracked. Both NOAA’s 6-10 Day and 8-14 Day Outlooks show high likelihood of warmer than normal temperatures. That being said, the 14 days forecast puts us at March 3, 2024, just two weeks away from the spring equinox. Winter is almost behind us and it’s been incredibly mild.
As we look ahead to summer, NOAA is forecasting a hotter than usual June/July/August 2024.
We are currently transitioning out of a significant El Niño season, with a mostly northern Polar Jet Stream, we had a milder than usual winter. As we approach April-June there is a 79% chance of ENSO-neutral, meaning no significant El Niño or La Niña system. A strong El Niño winter has historically increased the odds of a strong summer La Niña. June thru August presents a likelihood of a strong La Niña (55% chance). A strong La Niña will likely mean a warmer and drier summer.
We will continue updating our clients on summer forecasts as we get into Spring and forecasts become more accurate.
MARKET NEWS
Xcel’s Midwest Plan: 3.6 GW Renewables, 600 MW Storage in Conjunction with Natural Gas Peakers
Thursday, 2/1 Xcel Energy filed a new clean energy plan with Minnesota regulators that would help reduce carbon emissions while having an insignificant impact on customer pricing.
The plan is a 4-pronged approach with the hope of reducing 2005 carbon emissions levels down 88% by 2030.
The plan calls for:
• 3,600 MW of new wind and solar generating capacity, coupled with 600 MW of battery storage
• 20-year operating extensions for Xcel Energy’s Prairie Island and Monticello nuclear power plants
• Expansion and extension of Xcel’s energy efficiency and demand response programs
• Addition of 2,200 MW of new gas-fired peaker plants
Our take: While environmental pundits will object to the additional natural gas plants, we have to be realistic with our carbon emission goals and consider how much our emissions have already been reduced. Most people are on-board with reducing carbon emissions. The transition to intermittent renewables, along with battery, and the extension of nuclear power plants are all big steps towards this goal. The additional 2,200 MW of new gas-fired peaker plants will be the latest technology (low emissions) and only utilized when renewables are not performing. In our opinion this is a responsible, cost-effective approach to the transition and the best option to wean a utility off fossil fuel dependency.
ERCOT Interstate Connection
ERCOT Interstate Connection
In our last publication we covered the Southern Spirit Transmission Project, a 3,000 MW interstate connection between Texas, Mississippi, and Louisiana slated to come online in late 2029.
Last week the Connect the Grid Act was proposed on Capitol Hill. The bill outlines a plan to further interconnect the ERCOT grid with neighboring, SPP (Texas Panhandle, OK, KS), Western Interconnection (NM, CO, WY, MT and Alberta) and MISO (LA, and AR).
Connect the Grid Act outlines the recommended transmission capacities and timeline of implementing the project:
Upon ratification, within 6 months the Federal Energy Regulatory Commission (FERC) will provide technical recommendations.
Within 1 year of ratification the Independent System Operators (ISO), consisting of SPP, Western Interconnection, and MISO will identify entities to build or enhance existing transmission capacity.
Anticipated completion as laid out by the proposal is January 1, 2035.
SPP: 4.3 to 12.6 GW
MISO: 2.5 to 16.2 GW
Western Interconnection: 2.6 to 7.9 GW
*1 GW powers approximately 1 million households
Upon completion, the project would provide capacity from other markets to power between 9 and 37 million households.
Our take: Interconnected grids could provide further stability and reliability for electric markets. Supply diversification would help mitigate risks of outages as other ISO’s could be called upon in the event of generation disruptions. Pricing volatility could be reduced as generating scarcity could be avoided using alternative ISO capacity to make up shortfalls.
In reality, we see this bill facing some serious obstacles. Firstly, the bill would increase FERC’s oversight of ERCOT’s pricing and transmission planning. Secondly, the bill as outlined, would only come online in 2035. As ERCOT has been an island of electricity, we can’t imagine Texans taking kindly to further federal oversight. Additionally, after Winter Storm Uri (Feb. 2021), ERCOT has made great progress in managing risks of winter generation outages. On the flip side, ERCOT’s summer generating capacity has grown, keeping up with hotter summers, a growing population and robust economy. Although the bill is well intended, it is our opinion that Texan ingenuity and other solutions will help stablize the grid before 2035, when the Connect The Grid is anticipated to begin transmitting power.
GEOPOLITICS
Europe
Unfortunately, not much has changed since our last publication. The Russia Ukraine War continues to carry on at a slow pace with Russia making some advancements while Western governments continue to support the Ukrainian effort. At this time there is no way of predicting a time-line for this conflict or measuring the fallout before this is resolved.
Middle East
The conflict in the Middle East continues as well. Houthi rebels continue terrorizing merchant ships in the Gulf of Aden and Red Sea which feed into the Suez Canal. Daily Suez Canal transit 7-day moving average peaked in June 2023 at 83 transits/day, whereas the latest 7-day transit average has now dropped to 49 transits/day. The West has conducted military operations to try stabilize the essential shipping lane with minimal results.
South America
Venezuela’s oil exports have increased significantly as sanctions have been relaxed. From 2011 to 2021 Venezuela’s total energy production fell 8.2% on average annually.
Starting in 2022 the US government began granting sanction exemptions. In November 2022 the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) allowed waivers for Chevron to continue their joint venture with Venezuela’s state oil company (PDVSA) to allow Venezuela to export crude to the US Gulf Coast.
In January 2023 the OFAC issued a 2-year license for PDVSA to collaborate with Trinidad and Tobago on an offshore natural gas field.
In 2023 Venezuela’s oil exports increased 12%. This is a small increase considering the country’s massive proven reserves. The problem with Venezuela’s energy sector beyond sanctions, is that infrastructure has been poorly maintained with a severe lack of capital and maintenance, and the country suffering from rampant corruption.
Clearly, the impact of decades old sanctions have had a limited impact. The trend towards further cooperation and Venezuela’s return to the global energy market could help stabilize pricing and provide a reliable revenue stream for the people of Venezuela.
Currently, NYMEX natural gas sits at about $1.77/MMBtu, while Dutch TTF is at $7.89/MMBtu, UK NBP is at $7.69/MMBtu, and Japan/Korea is at $8.59/MMBtu.