PJM Wholesale Price Update

This week the PJM Market Monitor put out an update on year to date wholesale power. The report breaks down costs hitting the big three: energy, transmission, and capacity.

Given the ongoing conversations of compute power, AI, and load growth, it's a fair assumption to expect an increase in year over year pricing. We've discussed the big three in some form on these pages in the past with a lot of who is going to pay for transmission and capacity. We knew the rise in capacity would be material given the market's big increase this year. If you recall, PJM is currently under a price cap because of the hockey stick rise in pricing with chart below showing $11.76 from $3.62/MWh. There has also been a lot of discussion about transmission and grid build out. Admittedly, that discussion is usually focused on MISO, but PJM has the same issue. We were a little surprised to see the increase was less than a dollar per MWh. If we were betting, we'd have taken the over $1 and it's possible the increase we've perceived shows up next year.

Where this really gets interesting to us is the energy part of the equation. We know, AI and load growth are driving prices...or are they? We've had numerous discussions about natural gas being the marginal fuel setting price. We've talked on and on about some of the drivers we think are going to increase the volatility of prices in the future and why. Just last week we were mentioning a record month in LNG export with those numbers likely to rise. Anyway, looking at the charts of natural gas and energy prices below there is still a strong correlation between the price of natural gas and electricity energy prices. While we wouldn't argue that increased load to come will have an impact on electricity prices, it's still the input fuels that drive the energy component, and energy is still the day to day driver of overall prices.

Natural Gas Market Commentary

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Natural gas futures are on pace to finish the week pretty much where they started after yet another stretch of volatile trading. Most of the country has been enjoying unusually mild weather, which kept a lid on market sentiment and helped pushed prices lower early in the week. But as the week went on, the short-term forecasts flipped hard toward a colder pattern starting on Thanksgiving and carrying through the long weekend. That cooldown looks legit and is likely to last at least into the first week of December. Even with the pullback from last week’s highs, the Dec25–Mar26 strip is still up close to 20% from the mid-October lows.

We also got what might end up being a “false start” to withdrawal season. The EIA posted a 14-Bcf draw during a week that usually sees an injection, bringing inventories down to 3,946 Bcf. But the seasonal peak probably isn’t set in stone just yet. With this week’s mild temps dragging down demand, we’re likely to see one more modest build in next Wednesday’s report. That could nudge storage slightly above the 3,960 Bcf level hit on November 7. Either way, traders aren’t too concerned about the exact number right now, as all eyes are on how quickly winter withdrawals ramp as colder weather takes hold.

If winter decides to show up early and the cold shows staying power, that would validate a lot of the market’s pre-season jitters. Early-season cold tends to hit sentiment harder than anything that happens later in the winter. A fast start to withdrawals would raise the stakes for end-of-season storage levels if the cold sticks around. The forward curve already has a healthy risk premium baked in for December and January especially, so you can argue the market’s leaning that way already. But there’s still room for things to get interesting. If the weather lands on the more extreme side, the door is still very much open for additional upside risk.

Cocktail Corner- The Bond Market Always Knows First

The holiday season is upon us, which means more weekend parties. That means we might have to turn our occasional cocktail party talking points into a series for a month or two.

Like any publication talking electricity, the WPO has had plenty of comments on compute power and AI, heck, see above. The narrative is the ongoing development of AI and data centers is driving load growth and ultimately electric prices. That same narrative pushed stock prices of any company speaking AI in their quarterly conference call higher, and especially if you were selling the picks and shovels of the boom. This week, the rose colored hue has faded a little as the often talked about bubble might be popping, or at least deflating.

This weekend as you slide into the conversation about the AI stock market kerfuffle, when asked your thoughts, in your most Grey Poupon voice possible simply respond with, "I'm sorry, stocks are cute but simple. I (emphasize the I) only look at credit default spreads as the bond market always knows first.". Once you've explained that CDS is basically an insurance premium on a company defaulting on its bonds, or like a put option contract on a stock, pull out the WPO and show them the chart below. This is a chart of the CDS of Oracle who is one of the biggest pick and shovel companies of the AI boom. We'd characterize this more as interesting than alarming, but fair to say alarming is a possibility. The divergence from the Index is the most interesting as Oracle has consistently traded below indicating perceived safety. Again, these markets have the ability to overreact like any market, but it's worth putting this on the radar and looking for plenty of weekend "expert" comments.

By the way, if your conversation on CDS turns to how to learn more, just turn to the movie the Big Short. That does a pretty good job of explaining some of this stuff. Also, and this is very important, if you are going to talk about CDS, you do so with an old fashion or glass of red wine in hand and you should probably be able to discuss the hint of barrel wood flavor in each. Remember, Busch Light is for stock guys, sophistication is for folks talking CDS.