Infinity Insights - Volume 12, Issue 26

AT-A-GLANCE SUMMARY

Extreme weather has driven natural gas prices higher without much respite.

SUMMARY OF THE LAST WEEK IN CHARTS

Spot month natural gas (August) support at 7.00 with resistance at 8.50 then 9.50.  

Calendar year 2023 finds support at 5.00 with resistance at 6.00. Calendar year 2024 has support at 4.20 with resistance at 5.35.

Roadmap

NYMEX natural gas spot month (August) settled higher by $1.283 at $8.299

Cal 2023
Calendar 2023 ended up by ≈$0.3175 at $5.485

Cal 2024
Calendar 2024 settled better by ≈$0.065 at $4.70

The “Widow Maker” 2023

Volatility…

OUR TAKE ON THE MARKETS 

NYMEX Natural Gas

Extreme weather has driven natural gas prices higher without much respite. The persistence of heat and drought stress the power grid beyond historic levels. The next resistance for spot month NYMEX natural gas is $9.50. The back of the curve is much less volatile and remains a buy near $4.

The spike in prices has some power procurers looking at what different structures might offer. The options include load following fixed price, index, block and index, and heat rate. Taking each in turn:

·           Load following fixed price – Accept the current fixed price offering, avoiding assumption of risk (by leaving some part open). This is our preferred strategy if front of curve neat support at $5.50 and back of curve near $4.

·           Index – Accept the price offered by real time pricing with the anticipation of floating index price to be lower than alternative structures. Since the February 2021 Valentine’s Day freeze, the rules and protocol for LMP pricing have changed. The objective was to smooth out market “hiccups”. This new process has not stood the test of time yet and the wilds of Texas in the summer is not a good petri dish. We choose to wait on this strategy.

·           Block and Index – Lock in part of the load by purchasing a block (set volume of fixed price offering) and purchasing the balance of load via real time pricing (LMP).The fixed price block is acceptable if natural gas prices match the support levels stated above. Looking to the LMP side, we reiterate our reluctance to participate until it is better understood.

·           Heat Rate – Lock in the cost of generation portion of power price while floating (waiting) on lower feedstock price (natural gas). Given the current elevated price for natural gas, perhaps locking in heat rate and waiting on natural gas to fall might be an opportunity. The deciding factors include believing that natural gas will more likely fall than rise, and having the risk defined in case you are wrong. Other than load following fixed price at support, this is the only structure we would consider (and then only for a suitable client who understands the risk and has load size that will benefit from success).

In summary, structure procurement needs a reason to be considered. Given the pros and cons mentioned above, we have limited possibilities to load following fixed price and heat rate if natural gas prices justify the risk.

WHOLESALE POWER

ERCOT

Prices continue to follow natural gas.

PJM

Prices continue to follow natural gas.