Infinity Insights - Volume 14, Issue 9
MONTHLY UPDATE - OCTOBER 2024 EDITION
NATURAL GAS
NYMEX Natural Gas has settled in the $2.70 range. Natural gas has firmed in both spot and future pricing since September. The natural gas rally is attributed to softening inventories coupled with growing geopolitical uncertainty in the Middle East. Although inventories remain high; 3.7% above the year ago mark and 5.7% above the 5-year avg., inventories represent a regression to the average. For reference, year-to-date inventories have averaged 13% above the year ago mark.
Spot month natural gas has support at $2.35 with resistance at $3.00.
Calendar year 2024 finds support at $2.25 with resistance at $3.10. Calendar year 2025 has support at $2.78 with resistance at $3.90, a slight increase across the board versus prior month.
Production remains strong at 101 Bcf/day. According to EIA’s Shot-Term Energy Outlook “we expect the Henry Hub price to continue rising to around $2.80/MMBtu in the fourth quarter of 2024 and to further increase to around $3.10/MMBtu on average in 2025.” Demand is forecasted to increase with greater heating needs this winter as compared to last year and significant additional LNG export capacity coming online in 2025.
Putting the natural gas “rally” into perspective, today’s spot price is approximately 20% above the YTD average.
Global natural gas prices ($/MMBtu):
Henry Hub (USA): $2.68
NBP (UK): $12.07
TTF (Dutch) $12.24
JKM (Japan/Korea) $13.10
WEATHER
NOAA 6-10 day forecast (10/19-10/23) shows above normal temperatures for most of the US. The 8-14 day forecast (10/21-10/27) shows above normal temperature for most of the country with some colder conditions developing only in the northwest. On a population weighted basis we expect to see some significant but short lived cold weather October 16 – 17 then returning to normal conditions.
As mentioned earlier, this winter is expected to be colder than the 23/24 winter. That being said, 23/24 was the mildest winter on record for the US. 24/25 is expected to be a relatively mild winter too.
The greatest threat for extremely cold weather is a disruption in the polar vortex. The northern polar vortex is a low pressure system of swirling winds, similar to a jet stream in the stratosphere, circulating counterclockwise above the North Pole. The system contains frigid air over the Arctic. In the event of sudden stratospheric warming (SSW), temperatures quickly rise and disrupt the flow of the vortex, which can cause the cold air to escape and travel south. For reference, the collapse of the polar vortex is what caused Winter Storm Uri in 2021. It is difficult to forecast how the solar vortex will perform in a seasonal forecast because it is unpredictable and can be impacted by many different factors. According to Severe Weather Europe, the vortex is currently forming as would be expected for this time of year.
Atlantic Activity
There is a disturbance in the mid-Atlantic with a 50% chance of formation in the next 7 days. The system is producing disorganized showers and thunderstorms and is unlikely to organize into a cyclone in the next few days. As the disturbance moves west towards more humid air later this week chances of formation increase. The system is forecasted to travel west towards the Caribbean. We will have a better idea of trajectory once/if the formation organizes into a cyclone.
Ocean heat content remains elevated compared to historical averages but have regressed to 2023 levels in the Main Development Region, Caribbean, and Tropical East Atlantic. Meanwhile, we’re seeing Gulf of Mexico heat content below the 10-year average. The sudden drop in Gulf of Mexico heat content is mainly due to major hurricanes forming in the Gulf of Mexico.
The Gulf’s most recent hurricane, Hurricane Milton formed in the Gulf of Mexico. The low pressure system causes hot surface water to evaporate, water tension is broken and energy in the form of heat is released from the water and dissipates into the atmosphere. The water eventually precipitate as thunderstorms, bringing cooler water to the region and reducing heat content for the body of water.
Milton was our 13th named storm of the season. It still looks unlikely we see the more than 23 named storms as was predicted for this season, though it is unusual to see activity picking up this late in the season. So far we have seen a subdued Atlantic Hurricane season but an active 2nd half of the season. Hurricane season officially ends November 30th.
MARKET NEWS
The US economy is currently strong according to most indicators. The unemployment report ticked favorable from 4.2% in August to 4.1% in September.
Equity markets are once again at all-time highs. September inflation increased .2%, up 2.4% in the trailing 12 months. Core inflation (excluding food and energy) came in a bit hotter at .3% for September and 3.3% over the trailing 12 month period. The Fed’s inflationary goal is to maintain an annual level of 2%.
September 2024 the US Federal Reserve cut rates by 50 basis points for the first time in 4 years, signaling a shift in The Fed’s dual mandate. The Fed’s dual mandate is to keep inflation low and employment high, a tough balancing act. The interest rate cut indicates the focus of the dual mandate is pivoting – focusing less on inflation and more-so on job creation by easing monetary policy. Treasury yields and mortgage rates were minimally impacted by the move as the cut was already priced in.
PJM Capacity Auction Delay
Environmental groups including the Sierra Club and Natural Resources Defense Council filed a complaint with the Federal Energy Regulatory Commission (FERC) regarding PJM’s auction rules. PJM’s capacity auction does not include generators that are considered RMR or reliability must run. An RMR designation is made when a generator alerts an independent system operator (ISO), such as PJM, that the generator wants to retire a generating plant. Typically, plants are retired because of economics where they are no longer profitable to run, or they are outdated and can no longer meet environmental requirements. If the ISO determines the retirement of such a plant would be detrimental to the reliability of the grid the ISO can designate the plant as RMR and require the generator to remain available to run in times of scarcity. The generators are compensated at a premium for their availability. Because these plants are on “standby” they are not considered part of the generating fleet for capacity auctions. The FERC complaint argues that excluding RMR plants from the capacity auction artificially inflates prices and should be considered part of the auction as they are available and utilized resources and would help in curbing costs for ratepayers.
July 30th PJM completed its Base Residual Auction for 2025/2026 which resulted in a whopping $269.92/MW-day clearing price – an 800% increase over the 2024/2025 auction result. These results help bring attention to the auction rules and changing market dynamics.
PJM plans to respond to the complaint by the October 17th deadline. The 2026/2027 auction was planned for December but is expected to be delayed about 6 months due to the complaint.
Our take: RMR generators should be included in Base Residual Auctions. The changing energy world is evolving with retiring less efficient and polluting generators. We realize these plants are needed to maintain resilience across the ISO’s as we transition and lean more heavily on renewables. It is inaccurate to artificially suppress the supply side of the market which results in inflated prices, especially while the transition to renewables and retirement of thermal plants accelerates.
Dockworker Strike
Dockworkers started walking the picket lines early Tuesday, October 1 as the existing contract between the United States Maritime Alliance (USMX) and the International Longshoremen’s Association (ILA) expired at midnight. The strike had halted operations in 36 major US ports from Maine to Houston. The ILA’s main points of contention are the record profits realized by the USMX members while ILA’s compensation remained stagnant, and secondly, fear of jobs being eliminated through port automation. The ILA requested a 77% pay raise over a six year contract while the USMX offered a 50% pay raise over the term of the contract and keeping the existing limitations on automations.
Reuters has estimated the strike cost the US economy $5 billion per day. Thursday, October 3 the strike was suspended and ports resumed operation when a tentative deal was reached, which includes a 62% wage increase over the six year contract term while limitations on automation remains. Contract negotiations have been extended until January 15, 2025. Strikes could resume January 16 if an agreement is not finalized.
It appears the 3 day strike did not cause major supply chain issues. Many importers overstocked and rerouted vessels in anticipation of disruptions caused by the contract expiration. A longer lasting strike would have caused issues impacting almost every industry from retail & consumer goods to agriculture, manufacturing and healthcare. The ILA finds itself in a powerful position as supply chain interruptions would be highly inflationary and further delay an already hampered recovery effort in the wake of Hurricane Helene.
Return of Nuclear
We’re in the midst of a huge electric demand surge. The growth in electric demand is being fueled by datacenters, electrification and industrial expansion. To fulfill the growing need for electricity generators are looking at an old reliable source with a questionable history.
The first commercial nuclear reactor in the US came online in 1958. Expansion of nuclear generation continued through the 1960’s and 1970’s. In 1979 Three Mile Island experienced a partial meltdown. The meltdown was mostly contained and caused no direct casualties but nuclear power’s reputation would be forever tarnished after the incident. Nuclear power expansion stagnated in the 1980’s through the 2000’s. On March 11, 2011 the Fukushima Daiichi Nuclear Power Plant in Japan suffered a meltdown, further raising the public’s skepticism over nuclear power generation. After further investigation of the Fukushima disaster it became apparent there were major flaws in the design and location of the power plant. Namely, the plant was located near a fault line susceptible to earthquakes and tsunamis, coupled with cooling systems and backup power that were below grade and knocked out of service as a result of the tsunami. Experts agree this location and design should never have been used and the disaster was avoidable.
American nuclear power generation took another hit with Georgia Power’s Vogtle Electric Generating Plant units 3 and 4 expansion, the most recent addition to the US nuclear fleet. The projects experienced about 2 years in delays and approximately $16B in cost overruns.
On Monday, September 23rd 14 major financial institutions endorsed a goal to triple global nuclear capacity by 2050. This is relevant because the financial institutions essentially have the final say on whether or not these capital intensive projects get green lit. Also worth noting, the vast majority of capital for new power generation has gone into renewables such as wind and solar. Because of the intermittent nature of these power sources, actual generation and return on investment is all subject to nature’s unpredictability. Nuclear on the other hand has a far more predictable generating capacity and therefore return on investment.
Monday, 9/30 Holtec International announced closing a $1.5 billion federal loan to restart the Palisades nuclear plant in Covert Township, Michigan. The plant is expected to come online late 2025, producing 805 MW of electricity. Holtec “plans to nearly double the capacity of Palisades in the 2030’s by building new designs called small modular rectors at the site”.
This announcement comes on the heels of Microsoft and Constellation Energy announcing a deal to re-open Three Mile Island - Unit 1, expected to come online in 2028, producing 837 MW of electricity under the name Crane Clean Energy Center.
Governor Josh Shapiro of Pennsylvania is pushing PJM Interconnection to roll out a fast-tracked process to review interconnection requests for “shovel-ready generation”. New generation is usually placed at the back of the interconnect queue. Shapiro is arguing that these dormant power plants should be expedited considering how significant their production is and they had already qualified for approval as they had existed as part of the generating fleet. In an open letter Shapiro wrote “Given the lengthy review process for new projects, it is imperative that shovel-ready resources like the Crane Energy Center be allowed to come online as quickly as possible rather than waiting in the (interconnection) queue as if they were an entirely new development”. It seems reasonable that large generation projects that had already received approval should get preferable treatment and expedited through the approval process.
Also worth noting, as datacenters and electrification are the main drivers for the growth in demand, we should consider how this impacts the demand curve on a typical day. Datacenters and EV charging draw power around the clock relatively consistently. Traditional peaks in demand are mainly driven by HVAC and manufacturing schedules. These schedules usually follow the work day with a small peak in the morning as buildings and facilities come online, then gradually increase through the day as the need for cooling increase. Demand begins to fall off around 6:00 pm as office buildings and manufacturing shut down and sunset provides a respite in the heat.
Datacenters and EV charging on the other hand is consistent and flat. As we know, wind and solar are great compliments for each other. The wind is most productive at night and solar is productive during the day.
Nuclear is far better suited for consistent, flat demand curves such as datacenters and EV charging as nuclear power plants, aside from maintenance and refueling, generate consistent power for 50 to 80 years.
We are witnessing the resurgence of nuclear power. This is imperative as we see unprecedented demand growth with datacenters (AI) and electrification (EV’s).
