Q4 2021

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.

2021 Q4 Outlook

Did somebody say La Niña?

With the United States, Europe and Asia returning to pre-COVID-19 demand for energy sources and especially natural gas, weather has stepped upfront as the main driver for volatility this coming winter and beyond. La Niña, the Little Girl, has the opposite effect on weather compared to her little brother, El Niño. During a La Niña event, trade winds in the Pacific are stronger than usual pushing warm water towards Asia bringing colder, nutrient rich water to the surface off the west coast of the Americas. Such cold water temperatures push the jet stream northward causing drought and warmer winter temperatures for the South with heavy rains and flooding in the Pacific Northwest and Canada. Temperatures in the North tend to be colder with unpredictable dips and rises throughout the winter.

La Nina Forecast

Currently Pacific water temperatures are registering 0.8 degrees C cooler than average establishing a weak La Niña; temperatures at 1 to 1.5 degrees C cooler than average pushes us into moderate territory and anything below 1.5 degrees C gets the full brunt of the Little Girl with strong influence on the Polar Jet Stream.

To add to this year’s worries this past winter’s February storm, Yuri, wiped out our cushion of natural gas storage excess, and we have been playing catch up since then. Natural gas prices and, in turn, electric prices have skyrocketed, and even though we have had some strong storage injections recently, our current natural gas inventory is well below the five-year average with only a few weeks left in the injection season.

Natural Gas Storage

Storage Deficit Widens

Natural Gas Chart

The Energy Information Administration (EIA) “Natural Gas Storage Report” shows working gas in storage was 3,369 as of Friday, October 8, 2021, according to EIA estimates. This represents a net increase of 81 Bcf from the previous week. Stocks were 501 Bcf lower than last year same period and 174 Bcf below the five-year average of 3,543 Bcf. At 3,369 Bcf, total working gas is within the five-year historical range.

Natural Gas Storage Levels (Bcf)
Current Storage Level 3,369
Storage – One Year Ago 4,044
5-Year Average Level 3,543

Every year the traditional storage injection season starts on April 1 and continues through October 31. This season started with strong injections, fizzling over the summer months and resurging during the fall but couldn’t catch up to last year or the five-year average. Last October, we finished the injection season at almost an all-time high. The current injection deficit is not usually worrisome, but if we take into consideration that last year same period storage levels were more than 20% higher compared to the five-year average, we might have a problem. Last summer we had more gas in storage than this year’s expectations, yet we still had price spikes during high-demand periods. Last February’s cold weather event wiped out our storage advantage with substantial price spikes. 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 production continues to play catch up, price volatility with spikes during high-demand periods is here to stay. EIA is projecting storage volumes to remain below the five-year average for the foreseeable future.

Dry Gas Production

U.S. natural gas production was estimated at 92.3 billion cubic feet per day (Bcf/d) for the week ending October 6, higher than September’s average of 91.8 Bcf/d, but we are still well below November 2019’s monthly record of 95.4 Bcf/d. The EIA is forecasting that production for 2022 will rebound adding an average of 3 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 2021. LNG markets have been shaken by tight European and Asian supply for the coming winter. The Russian supply front is caught in a political game and U.S. LNG export capacity will likely max out at 12 Bcf/d, weather pending. LNG for November 2021 delivery is trading at approximately $28 per MMBtu in Europe and $38 per MMBtu in Asia.

Weather Forecast

La Nina is in Control, Hoping for a Mild to Average Winter!

Temperature Outlook

Source: Weather.com

Much of the Lower 48 will experience milder-than-average temperatures in November, but a shift to a warmer than average southern tier and colder conditions across parts of the northern United States is anticipated this winter, according to the latest outlook from The Weather Company.

Above-average temperatures are expected from the Southwest into the Midwest and portions of the Northeast in November. Meanwhile, temperatures will trend near average to slightly colder in November for much of the South and far northwestern Washington.

This winter, there will be a change to near average or slightly colder temperatures from parts of the Northwest into the Central Plains, Great Lakes and far interior Northeast. Northeastern Montana and northern North Dakota will experience temperatures the farthest below average.

Areas from Florida and the Southeast into parts of the Great Basin and Southwest can expect temperatures to be warmer than average from December through February. Temperatures will be the most above average from southern New Mexico into southwestern Texas. Elsewhere, most of the Northeast and mid-Atlantic into parts of the Plains and West will find temperatures near average to slightly warmer this winter.

Much of the late-fall and winter forecast is driven by a developing La Niña. La Niña is the periodic cooling of the equatorial Pacific Ocean waters, which can influence weather patterns across the globe, including in the U.S.

The November outlook resembles what is often observed in November during a La Niña year, except for the Southeast, where models suggest colder temperatures are likely early in the month. The winter outlook is also based on La Niña’s typical influence, which usually means colder in the northern and western U.S. and warmer in the South and East.

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 six 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 US economy experienced its largest contraction in 74 years by dropping 3.5% in 2020. The economy has moved from 30% capacity last year 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 energy price spikes have assured that inflationary pressure will remain in place for the foreseeable future. Higher energy prices result in less disposable income, harming discretionary spending, which drives 70% of the U.S. economy.

Natural Gas 12-month strip prices experienced a substantial increase over the last quarter. 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 are at 99 compared to the low of 68 back in July of 2020.

Currently 12-month strip futures pricing is at $4.52 per MMBtu compared the five-year average of $2.93. The average price for 2020 was barely above $2.00.

Natural Gas Graph

Crude oil is currently over $80 per barrel, the highest prices since October 2018, but producers may still restrain spending for additional production. Oil rigs are currently at 433 compared to the low of 172 back in August of 2020. 2021 capital investments in the U.S. oil production are projected to come in at the lowest levels since 2004. Despite next year’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. The regional markets 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.

The weekly forward power price update is as follows:

Pricing Chart

Renewable and Coal Electric Generation – Two Extremes Coexisting EIA assumes that current laws and regulations continue into the future; thus, they are projecting renewable resources – particularly solar and wind – will be the largest contributor to the growth in electricity generation through 2050.

World Energy Chart

However, certain regions will still mainly use coal resources for electricity generation. Of the world’s existing coal-fired generating capacity, 99% consists of boilers and steam turbine units that are as much as 30% less efficient than natural gas-fired combined-cycle units that use the latest technology. Because natural gas-fired generators are more efficient than coal-fired generators at converting fuel to electricity, natural gas-fired generation is often a lower-cost option, even if the fuel price of natural gas is slightly higher than the fuel price of coal.

However, the absence of regional carbon policies or regulations along with rising natural gas prices after 2030 — particularly in Asia and in regions that rely on higher-cost liquefied natural gas (LNG) — is likely to make coal the most economical generation fuel to pair with increased intermittent generation from wind and solar. This shift reverses the trend observed over recent decades. Although the cost of mining coal will likely raise coal prices after 2030, EIA projects that coal prices will remain low relative to natural gas prices and provide a cost-competitive option to natural gas-fired generation.

Increases in coal-fired generation in other non-OECD Asia — which includes Indonesia, Vietnam, and Thailand, among other countries — will account for over 75% of our projected increase in global coal-fired generation from 2030 to 2050. For Other non-OECD Asia, we project that renewable energy sources will account for about 60% of the generation increase over the projection period, primarily from wind and solar. Coal-fired generation will account for nearly all the remaining growth.

Asia Energy Chart

Other non-OECD Asia is a geographically diverse region. Several countries in the region have limited domestic natural gas resources and have constrained access to natural gas pipelines and LNG regasification terminals. In 2030, EIA projects that coal-fired generation will start displacing some natural gas-fired generation in other non-OECD Asia because of abundant coal resources that can be competitively mined, natural gas prices that are projected to increase after 2030, and a lack of carbon policies or regulations in the region. Coal-fired generation will steadily increase in Other non-OECD Asia through 2050; coal’s share of the region’s generation mix is projected to increase from 33% in 2020 to almost 50% in 2050.

OECD – Organization for Economic Cooperation & Development

Bottom Line

Higher Energy Prices Are Here to Stay

Within the next month, if you haven’t secured your supply loads for the upcoming winter, Buy at any near-term market weakness! Mild balance of the month weather forecasts suggest the U.S. may hold off until at least November before seeing a large increase in Heating Degree Days. Steady natural gas production and a lack of heating demand may allow injections to continue, further reducing storage deficits and building confidence in the resulting storage levels. Near-term temperature forecasts will determine if price volatility returns strong. If we see a sharp drop in temperatures early in the heating season, tighten your seatbelts, it will be a bumpy ride.

There are still several factors driving volatility, such as the upcoming heating season and how the Little Girl will affect our weather. A cold winter will drive prices further up. LNG exports continue to increase with very attractive prices to the producers. And the coronavirus still lingers, would a resurgence cause repeat lockdowns and cuts in demand?

End of Q1 2022 could be our first real opportunity to secure favorable future pricing. If the winter gives us a break and the market looks beyond possible heating season shortfalls, we could see prices fall. 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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