Infinity Insights - Volume 14, Issue 5
MONTHLY UPDATE - MAY 2024 EDITION
NATURAL GAS
NYMEX Natural Gas has settled to the $2.75 range with the most recent EIA Weekly Natural Gas Storage Report showing a net injection of 70 Bcf week over week, significantly less than consensus estimate at 76 Bcf.
Natural gas fundamentals are bullish across the board. Inventories are decreasing vs. the recent robust inventory prints, production cuts continue, exports are picking up, and domestic consumption is increasing.
· US rig count continues to decline, down to 103 vs 118 rig count in January
· atest Inventory Report shows inventories stand at 31% greater than the 5-yr history, whereas 4/25 was 37% and 5/2 was 35% above the 5-yr average, trending downward
· Freeport LNG Terminal is back online, YTD average exports have ticked up to 13.1 Bcf/day
Spot month natural gas has support at $2.00 with resistance at $3.00.
Calendar year 2024 finds support at $2.50 with resistance at $3.70. Calendar year 2025 has support at $3.00 with resistance at $4.25, a sharp increase versus prior month.
Although we’ve seen a massive run-up in spot natural gas prices as shown in the 30 Day graph, spot natural gas remains relatively inexpensive with robust inventories. As noted above, we expect domestic inventories to decrease with rig counts decreasing while exports increase thus putting upward pressure on future prices, as indicated by the Natural Gas Forward Strips graph.
WEATHER
Too much red on the map! Short-term forecast shows a hotter than normal end of spring for most of the country. This hotter than normal spring has provided us with a sample of what is forecasted to be a top-5 hottest summer on record.
NOAA reports April 2024 contiguous US average maximum temperature was the 15th hottest recorded since this data was collected. And just like March, April was the hottest April world-wide in global climate records, dating back 175 years.
Heat content in the Atlantic Main Development Region remains an area of concern. Current temperature (May 22) is at the average for mid-August and shows no signs of slowing down. As mentioned before, this is a strong indicator of Atlantic hurricane season activity and intensity. Forecasted hurricane season remains highly active. There are currently no disturbances in the Atlantic. We will continue keeping our clients abreast of any development.
MARKET NEWS
FERC Transmission Overhaul
Monday, May 13 the US Federal Energy Regulatory Commission (FERC) approved a major long-term transmission rule overhaul. The new rule requires transmission owners to create a 20-year assessment plan for regional electric transmission that would be revisited every 5 years. The rule requires allocation of transmission projects costs to be determined between private companies and state agencies. Plans will be provided to state agencies 6 months before FERC consideration and upon approval will then be submitted to FERC for final approval. Along with the private companies and state agencies, public meetings are required to be held during the planning stage.
The reason for the rule overhaul is to bolster the transmission infrastructure for the US grid as we lean more heavily on renewables. Wind and solar are more productive and constrained by certain geographical locations. For example, the top wind power generating states are Texas, Iowa, Oklahoma, Kansas, and Illinois. Most of these states are not necessarily experiencing population or manufacturing growth, but they do hold geographical advantages since wind is plentiful. In order to efficiently utilize this abundant resource transmission infrastructure needs to be built out further.
The rule was approved by FERC in a 2-1 vote with FERC Commissioner, Mark Christie, in opposition. Christie’s dissenting comments were “the commission rushed through the process and attempted to impose a major policy shift that favors renewables that went beyond FERC’s mandate”. FERC Chairman, Willie Phillips, who voted for the new rule noted “This rule cannot come fast enough, there is an urgent need to act to ensure the reliability and the affordability of our grid”.
Our take: The new rule is a major step forward in balancing and in-turn, stabilizing the grid. The process provides transparency for plans, allowing the public, companies and state agencies to voice their opinions. Undoubtedly, there will be inefficiencies and some rural state agencies may be left with sharing a cost of building transmission lines with limited benefits to their constituents, which is a valid argument, but we believe this will benefit and assist in the stable growth of the nation’s growing power needs.
Note: ERCOT is exempt to the new rule because EROCT is mostly independently and not interconnected with the national grid.
May 8th ERCOT Weather Watch
May 8th historical average high temperature for Dallas and Houston are 81 and 84. May 8, 2024 Dallas and Houston had high temperatures of 91 and 88, respectively. With the considerably warmer than normal spring we’ve experienced, and population and commercial growth in the state the electric grid was strained May 8th between 8:00 and 9:00 p.m.
The unseasonably hot day triggered an EROT Weather Watch for May 8th. ERCOT was concerned demand could exceeding generation during the 8:00 and 9:00 p.m. hours when wind generation is low and solar completely falls off. In the event of demand exceeding generation, the grid would be forced to activate rolling blackouts in order to reduce demand and protect grid infrastructure.
The Weather Watch (May 8th) was during the spring maintenance season when capacity is taken offline. Typically, we see maintenance season impacting coal, gas and nuclear generation. Maintenance season was cut short this spring for some generators as EROCT requested scheduled maintenance to be skipped the week of April 15 as the grid was already struggling to keep up with unseasonably hot weather. Many generators were unable to skip scheduled maintenance and remained offline. In addition to the scheduled maintenance season, we’ve seen a decrease in nuclear generation. The decrease is attributed to the South Texas Project Nuclear Power Plant, which has one unit down for scheduled refueling and maintenance. In total, ERCOT’s nuclear generation capacity is down 25% versus February 2024.
All that being said, May 8th was a real test for the gird. During the day ERCOT’s forecasted Operating Reserve where expected to be only 2,200MW, whereas normal conditions are about 9,000MW. What happened during the 8:00 pm and 9:00 pm hours was quite remarkable. As scarcity grew with falling generation prices spiked to the $5,000/MW cap ($5/kW). This price incentivizes all generating capacity to come online. During this time easily dispatchable natural gas did the lion’s share of generation with 64% of grid generation, and battery storage was deployed, covering a substantial 5.1% of grid generation. 5.1% may not seem impressive, but it proved to be lucrative for battery storage owners and shattered the previous battery storage deployment record set 9/6/2023 at 2,172MW, with a massive 3,195MW deployment at peak – a 47% increase. The result of this event was a grid that provided adequate power, and the market worked as designed, incentivizing generation at a time of scarcity.
Our take: the grid performed well during a time of very high demand. ERCOT appears to be responsibly deploying wind and solar generation. This was a major issue in California where there was a rush to deploy renewables and CAISO was unable to stabilize the grid when renewables did not perform.
ERCOT will face future challenges while the grid is being strained more and more as maintenance seasons are shortened, weather becomes more unpredictable/extreme, peak demand increases, and our energy needs continue to grow through electrification.
GEOPOLITICS
Middle East
Israel appears to be cooperating with the US’s request for a limited incursion of Gaza’s largest southern city, Rafah. There does not appear to be any further direct escalation between Iran and Israel since the April 13 aerial attack.
Sunday, May 19th Iranian president Ebrahim Raisi died in a helicopter accident along with Iran’s Foreign Minister and other Iranian officials. The sudden passing of the president doesn’t appear to be spurring any domestic upheaval since the president in Iran is more of a figurehead, with Supreme Leader Ayatollah Ali Khamenei firmly at the helm. Commodity markets have been unaffected by the news.
The Hague’s International Criminal Court prosecutors are seeking arrest warrants for Israeli Prime Minister Benjamin Netanyahu as well as Hamas leader Yahya Sinwar.
Europe
The Russian Ukraine War continues. Russia appears to be focused on Kharkiv, Ukraine’s second biggest city, which analysts are calling “tactically significant advances”. Russia has also made significant advances on smaller Ukrainian cities near the northeast border.
Recent data suggests Britain’s inflation problems are heading in the right direction, falling steadily. The recent data suggests the Bank of England could cut interest rates as soon as June. Euro Zone economic data shows a similar decline in inflation, also eyeing an interest rate cut as soon as June.
Global natural gas prices ($/MMBtu):
Henry Hub (USA): $2.50
NBP (UK): $9.25
TTF (Dutch) $9.65
JKM (Japan/Korea) $11.05