Q1 2022

The RealPage® Energy Outlook

About the Energy Outlook

Get the details on pricing trends, weather, storage levels, tariffs and more.

The Energy Outlook is designed to inform you about the current state of the natural gas and electric energy markets. While prices are most important, we offer insights into the drivers of the energy markets and shed some light on how these drivers impact market prices. The primary energy market drivers fall into two areas: Fundamentals and Politics.

  • Fundamentals are the factors influencing energy supply and demand of electricity and natural gas. Supply factors include power generation, natural gas production (drilling rigs, fracking, and horizontal boring), underground gas storage and pipeline capacity. Demand factors include consumer usage and weather (driving how much energy is required for heating and air conditioning seasons).
  • Politics include changes to the legal and regulatory environment that can cause major moves in energy prices. Political impacts can include new emission standards such as mandated movement to cleaner generation facilities with higher operating costs, new energy taxes or fees, and restrictions on new pipeline or transmission line placement. Political factors can be domestic or international.

2022 Q1 Outlook

Weather, Storage and War?

The world continues its return to pre-COVID-19 demand for energy sources, especially natural gas. So far, La Niña has lived up to expectations and winter weather has been closer to the 10-year average, even though December 2021 was ranked as the 2nd-warmest since 1950. January and February came in colder than the 30-year average, forcing large natural gas storage withdrawals. And starting February 24, Russia moved on an invasion of Ukraine. Over the last decade, dependence on Russian natural gas pipeline delivery has increased to almost one-third of Europe’s demand, especially for Germany, the largest economy in Europe. Most of the pipelines flow through Ukraine and thus the big conundrum.

Natural Gas Storage

Storage Below the 5-year Average

The Energy Information Administration (EIA) “Natural Gas Storage Report” shows working gas in storage was 1,782 Bcf as of Friday, February 18, 2022. This represents a net decrease of 129 Bcf from the previous week. Stocks were 209 Bcf lower than last year same period and 214 Bcf below the 5-year average of 1,996 Bcf. At 1,782 Bcf, total working gas is within the 5-year historical range.

Natural Gas Storage Levels (Bcf)
Current Storage Level 1,782
Storage – One Year Ago 1,991
5-Year Average Level 1,996
Natural Gas Chart

Every year, the traditional storage withdrawal season starts on November 1 and continues through March 31. This season started with low withdrawals during the November/December mild weather demand, and withdrawal volumes increased substantially in January and February with March not looking much better. Last year’s withdrawal season finished above the 5-year average. This year’s trend lands us below the 5-year average, and we are hoping the next few weeks do not widen the deficit. The global economy is now in full motion, most of the markets are wide open, and global demand for natural gas has skyrocketed. Demand for natural gas will continue to be strong and as production continues to play catch up, price volatility with spikes during high demand periods is here to stay. The Russian/Ukrainian conflict will place higher demand pressure for U.S. LNG deliveries to Europe, thus lowering expected injection volumes to U.S. storage. EIA is projecting storage volumes to remain below the 5-year average for the foreseeable future.

U.S. natural gas production for the year to date has averaged at 93.6 billion cubic feet per day (Bcf/d) ― we are still well below November 2019’s monthly record of 95.4 Bcf/d. The EIA is forecasting that production for 2022 will average 96 Bcf/d, mostly driven by higher prices. As producers set their budgets for 2022, they will have to weigh maintaining current production as well as meeting additional demand pressure, but they will remain sensitive to forward market pricing.

U.S. LNG exports will continue to ramp up for the balance of 2022. The Russian/Ukrainian conflict and related sanctions will place a lot of pressure on the U.S. LNG export capacity, with recent flows topped at 13 Bcf/d. The U.S. is officially the largest global LNG exporter.

Dry Gas Production

Weather Forecast

Spring Weather Is Around the Corner

Temperature Outlook

Source: Weather.com

Much of the United States is expected to have a warmer-than-average early spring, according to the latest outlook from The Weather Company. A broad area from the Northeast to the Desert Southwest is expected to have at least slightly above-average temperatures from February through April. The highest chance of a warmer end to winter and early spring stretches across the southern states from central New Mexico into parts of Georgia and Florida. Areas from the Four Corners to the rest of the Southeast and into the mid-Atlantic are also expected to have a mild February through April.

But not everyone will be warm. Areas from the Pacific Northwest and California coast into the Northern Plains and upper Midwest are expected to see near-average or cooler conditions from February through April. Parts of Oregon and Washington into Montana have the highest chance of below-average temperatures.

The majority of the Lower 48 will see near-average or warmer temperatures in March. Temperatures are expected to be the farthest above average across parts of Oklahoma and Texas into Mississippi. Near-average or cooler temperatures are anticipated across portions of the California coast into the Northern Rockies and into North Dakota. Temperatures will be the farthest below average across parts of the Pacific Northwest into Montana.

The near-average to above-average temperature trend is expected to continue in April. Temperatures are expected to be the farthest above average across parts of New Mexico, Texas and Oklahoma. Areas from the Desert Southwest across the Southern Plains and into Florida could also experience above-average temperatures. Parts of the Pacific Northwest into the northern Great Lakes and Northeast could see near-average and slightly cooler temperatures in April.

Much of the forecast is again driven by La Niña, the periodic cooling of the equatorial Pacific Ocean waters, which can influence weather patterns across the globe. La Niña’s typical influence is a colder northern and western U.S. and warmer South and East, especially in February. La Niña conditions peaked in January, meaning we should start to see water temperatures in that region of the Pacific Ocean warm up again. However, the effects of La Niña on weather patterns can linger after the event has peaked, according to Todd Crawford, Director of Meteorology at Atmospheric G2. If La Niña conditions persist, the remainder of the winter could be drier and warmer than average for many in the South. Heading into spring, early heat and drought conditions are already a concern across much of the Plains and into the Southeast.

Energy Pricing Fundamentals

Near-Term Prices Are Up – Long-Term Prices Are Slightly Up

The Energy Outlook mainly focuses on natural gas prices because they tend to lead electricity prices. As natural gas prices increase or decrease, electricity prices often follow suit – but hours, days or weeks later. Also, natural gas has a national price established on the NYMEX. Other regional prices and markets exist but are compared with the NYMEX prices. Electricity is different because the U.S. is divided into 6 regional markets, each setting its own price and having its unique market rules. All six regions tend to move in the same direction, but price volatility and generation vary considerably between regions.

The U.S. economy experienced its largest contraction in 74 years by dropping 3.5% in 2020. The economy moved from 30% capacity in 2020 to approximately 100% by the end of 2021. The results of this increase have been higher prices and product shortages. Originally, inflation was advertised as temporary, but recent price spikes including energy have assured that inflationary pressure will remain in place for the foreseeable future. Higher prices for essential goods result in less disposable income, harming discretionary spending that drives 70% of the U.S. economy. As the Federal Reserve moves to raise interest rates, we worry about slowing down the economy and stalling the equity market growth, eventually leading into a recession. Very recent geopolitical conflicts could slow down the Federal Reserve’s activity.

Natural Gas 12-month strip prices experienced a substantial increase over the last six months. Higher natural gas-fired electric generation has kept demand up. Industrial use continues to show strength. LNG exports are showing high strength. Exports to Mexico have also increased. Production remains low compared to pre-COVID levels with low recent storage injections. Natural gas rigs as of February 18 are at 124, compared to the low of 68 back in July of 2020.

Recently 12-month strip futures pricing settled at $5.20 per MMBtu. February 2022 settled at $6.265 per MMBtu. The average price for 2020 was barely above $2.00, and for 2021 we were at $3.81.

Natural Gas Graph

Crude oil temporarily surged above $105 per barrel in late February, reaching the highest prices since 2014 on news of the Russian invasion into Ukraine. West Texas Intermediate and Brent settled below $100 by the end of the day. Oil rigs are currently at 520 compared to the low of 172 back in August of 2020. 2021 capital investments in U.S. oil production were at the lowest levels since 2004. Despite 2022’s projections of 15-20% boost in capital investments, oil production and its associated natural gas production will not see significant gains due to higher drilling costs and labor shortages.

Electricity markets are complex with many regional markets that may differ from the overall continental energy outlook. The increase in natural gas pricing and the related pipeline constraints are major factors for the foreseeable future.

Weekly forward power price updates as of the week of February 14 are as follows: (Source: CNE)

Pricing Chart

Russia / Ukraine Conflict: The Russian government’s recent move to potentially redraw the map of Ukraine with its recent invasion will further impact the already turbulent energy markets. Natural gas prices in Europe spiked, Germany decided to halt certification for the Nord Stream 2 pipeline, U.S. and European sanctions could prompt Russia to decrease oil and gas exports, and Europe’s dependence on Russian natural gas supply could lessen. All of this activity will certainly impact energy prices with added costs to the American consumer. Alternate natural gas sources for Europe are possible, but the current global production and supply restraints are also very real. The following map sourced by the European Union shows the importance of Ukraine as a pipeline hub between Russia and Europe.

Pricing Chart

The natural gas flow from Russia to Europe has increased during the last decade, while domestic production has decreased substantially. LNG is an option, but it is very expensive to produce and transport. Germany has become very dependent on Russian natural gas due to nuclear plant shutdowns.

Pricing Chart

Bottom Line

Higher Energy Prices Are Here to Stay

Within the next month, if you haven’t secured your supply loads for the upcoming summer and winter seasons, buy at any near-term market weakness! We are expecting weather to settle into milder temperature territory very soon. Storage levels at the end of the current withdrawal season (March 31) will determine if price volatility returns strong. If we see the storage deficit grow and summer weather comes in strong, keep your seatbelts tightened, because the bumpy ride is not over.

There are still several factors driving volatility, such as the storage condition, natural gas production, upcoming summer season, and how the conflict in Ukraine resolves. A hot summer will drive up prices further. LNG exports continue to increase with very attractive prices to the producers. European natural gas shortages into next winter could cause havoc in the market.

March/April of 2022 could be our first real opportunity to secure favorable future pricing. Work with your trusted broker on long-term pricing strategies to avoid market volatility and ensure budget certainty.

WHAT HAPPENS TO OUR BUDGET?

What happens to our budget if natural gas prices spike this winter or electricity prices spike this summer?

WHAT IS OUR RISK MANAGEMENT?

What is our risk management policy to protect the business against energy price volatility?

WHAT IS OUR RISK TOLERANCE?

Do we want budget certainty with fixed prices or do we want current market prices and the associated risk of cost fluctuations?

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