Baby, It's Cold Outside...wrong season

Last week we warned of the eminent cold and winter storms, and the weather lived up to the hype. ISO and generation operation centers were on high alert as the grid was stretched to its limit. Both PJM and MISO enacted regional emergency actions calling for extra generation and demand response customers to shed load. Last weekend was the roughest stretch as winter storm Fern started the three day trek from Texas to New England. Natural gas demand, plus weather related cuts in production (see chart below) sent weekend spot prices sky rocketing (see more below...Pinebrook) causing electricity prices to spike. Frankly, spike might be an understatement....around the clock electricity prices for the week at the MISO Indiana Hub trading point averaged roughly $360/MWh which was more than 10x the price of $34 from the same week last year. Looking at pricing below, it does appear there is some normalcy coming back to the markets. That said, it's a pretty safe bet that the rest of the winter will have a premium built in with gas and electricity jittery, with the slightest forecast of below normal temps assuredly setting off market angst.

The Death of Fossil Fuels has been Exaggerated

Every so often we find ourselves in a conversation with the 100% renewable crowd. Usually, we concede some admiration for renewables, and end the sentence with something along the lines of, 'what are you going to do in the winter when the sun doesn't shine enough and it gets cold?'. The response is either some sort of, "fair question" or "batteries". If the answer is batteries, we usually feign having to answer an urgent phone call or someone hailing us from across the room. For a serious conversation, we point out times like this weekend. Below are generation mixes for PJM, ISO-NE (New England), and MISO. We understand the times of some of these aren't conducive to renewables, which is kind of the point. Last Sunday morning, the wake up air temperature in the upper Midwest was minus 20, the real feel was minus 20. Given the make up of MISO in our neck of the woods, a real feel and air temp both at minus 20 is a real oh oh moment, as that means absolutely NO wind. The grid still needs fossil fuels, and a lot of them...coal, natural gas, and even oil.

Natural Gas Market Commentary

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This was another banner week for the natural gas market, as futures pricing continued roaring higher surrounding the February 2026 NYMEX expiration, and spot pricing reached unprecedented levels at key hubs.

We’ll start with the February NYMEX expiration. That contract rolled off the board on Wednesday at $7.46 per MMBtu. Not only did this represent a near-150% increase over just seven trading days, but it was also the highest that any February NYMEX contract has expired since 2008 (and the highest expiration overall since Sept 2022). Since March rolled to the front of the forward curve, the gains have persisted, although not to the same extremes. That contract is currently trading near $4.30 per MMBtu for the first time since December 5 after hitting lows below $2.60 earlier this month.

Thursday’s storage report showed a draw of 242 Bcf that only reflected the very beginning of the cold weather event. Subsequent reports are expected to show much larger storage deductions as a result of the demand spike and supply disruptions created by the cold. Preliminary estimates show withdrawal totals starting with yesterday’s report running through the week ending February 6 exceeding 820 Bcf, which would be the largest aggregate three-week storage deduction on record. This event, combined with expectations for lingering cold into February, has caused our end-of-season storage estimates to shift from a healthy surplus north of 2.1 Tcf to a deficit at 1.5 Tcf or lower, which will introduce new challenges in the way of refilling storage to healthy levels over the summer.

Spot pricing has settled down to some degree in recent days, but only after prices spiked early this week well above $100 in the East and $50 at key Midwestern and Mid-Continent hubs. This event even led to $10+ pricing in West Texas markets on top of the Permian Basin that have been in negative territory at times this winter. These price levels were exacerbated by lost supply during the most intense days of cold. Domestic natural gas production had been running above 111 Bcf per day earlier this month, but volumes cratered as low as 96 Bcf on Monday. This ~23% drop was spread across the South Central and Appalachian Region and illustrates how profound of an impact winter weather can have on the supply side of the balance sheet.

While there is some light at the end of the tunnel, there is currently no return to a widespread mild solution in the near-term forecast. With elevated February futures pricing, the market is accounting for the possibility of another major weather next month. Winter will eventually end, but we remain in the thick of it for the time being.

How Much?!- Cash or Credit

We joke, almost weekly, that the WPO is turning into the data center, compute power weekly update. As much as we'd like to get away from it, and we will at some point, there is weekly news worth mentioning. The speaking points are usually centered around large hyper scalers and what they are doing in the market. This week, it's Microsoft as they announced their quarterly earnings. Because data center spend has gotten so big, analysts and shareholders tune in to quarterly calls waiting for the capex numbers. Microsoft did not disappoint as they announced $37.5 BILLION in capex for the quarter with roughly two thirds in "short-lived" assets like CPUs and GPUs destine for AI. As CEO Nadella stated "We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises.". Investors greeted these comments and spending by sending MSFT down roughly 10%. This isn't the first 'pump the breaks' (our words) moment we have seen...Remember Oracle and their issues with Blue Owl pulling financing on a large data center in Michigan? Ultimately key metrics like return on investment will be demanded by investors giving CEOs the nod to keep spending away or turn off the money tree.

With the bluest of blue chip companies possibly having a spending issue relating to AI, we've been asking what about utility companies around the country. Companies providing electricity were already being told to upgrade their infrastructure, and in a lot of cases, with some climate initiative attached. Enter this new demand, and the investment ask of utilities has been large, and in a lot of cases uncomfortable. Cash strapped or debt burdened utilities are being asked to come up with even more funding. Right on cue, RBN Energy put out a great piece on this topic. RBN Energy is must read on a host of energy issues. The title of the article Electric Utility Balance Sheets Threatened by Record Debt from AI-Drive Capex says it all, but the whole article is worth the read. We've pulled one chart to provide a picture...and that's just investor owned utilities.