Market Divergence

An interesting thing has been going on in the electricity futures of PJM, MISO, and ERCOT (shown below) since the winter blast in January- divergence.  A year ago, the spread between the yearly strip of around the clock contracts was roughly $5, as of this week it is near $35. Part of the move might be explained with the risk premium for winter, but ERCOT isn’t totally insulated from winter, excuse the pun.  Is it possible all the talk of load growth is starting to show up in higher pricing?  If so, wouldn’t ERCOT have the same issue?  Perhaps, but ERCOT has shown that they have the ability to cut load when needed and have made impressive strides in battery technology that might be helping dampen some pricing.

Frankly, we aren’t sure the reason for the moves.  While we might not totally buy into the winter and data center arguments, at least for this big of a move, we aren’t going to dismiss them.  For the most part, we don’t make market prognostications on these pages, and we aren’t starting this week.  We just find the moves interesting and remind all, market’s can stay irrational longer than speculators can stay solvent.  Take out your hedging programs and act accordingly.

Natural Gas Market Commentary

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The natural gas market has continued to tread water this week in a sideways range, but recent days have seen a bit of upside momentum begin to take shape. Thursday’s storage report showed the smallest build of the season at just 32 Bcf. However, the midsummer lull in storage injections is no surprise to the market. The five-year average and year-ago builds for the same week were actually a bit lighter than what was reported yesterday. With major heat finally settling in over Texas and wind generation in a seasonal decline, power burn should remain strong in the coming weeks and drive even smaller storage injections.

Still, the market seems comfortable. The bottom hasn’t fallen out, but August NYMEX has so far been unable to muster a serious test of $3.00 per MMBtu. That contract is trading near $2.92 on Friday morning, and the path of least resistance still appears to be sideways.

With geopolitical risk coming back to the forefront, it is worth mentioning the potential impact of high European and Asian prices on the U.S. market. At this time, and throughout the history of the U.S. LNG export industry, our liquefaction fleet has generally operated at or near full capacity when economics support exports. This tends to insulate the U.S. from global price spikes. No matter how high prices get overseas, export capacity is constrained, and construction projects can only be accelerated so much.

However, one region that remains exposed is the Northeast. Due to domestic pipeline limitations, the region still imports small amounts of LNG on the coldest days of winter to meet peak heating needs. These marginal volumes come with a price tag that must be high enough to compete with buyers in Europe. As a result, winter gas for delivery into the Northeast generally follows European benchmark pricing closely. January 2027 forwards for Algonquin Citygate in Boston are currently priced firmly above $20 per MMBtu, while the NYMEX benchmark sits near $4.35 per MMBtu.

With dangerously low storage inventories in Europe and ongoing trouble in the Strait of Hormuz, a major downturn in the global natural gas market is unlikely. Consumers exposed to Northeast gas and power markets should be bracing for an expensive winter ahead.

Cocktail Corner

Cocktail Corner was created late last fall around the holiday season as a public service.  If you recall, it was our attempt to give some conversation nuggets for those times, at the spouse’s holiday party where you don’t know anyone and might need an arsenal of different, perhaps insightful, topics to discuss.  We’ve kept the bit rolling, because as it turns out, the party season really never stops as we are right in the middle of backyard BBQ season.

We feel like this week’s topic should come with a disclaimer, or a warning label.  If you choose to venture into this topic, tread lightly as this can be a very contentious topic in this time of division.  Or, more likely, umph, be prepared to be labeled the most boring person at the party.

This week’s topic?  Day Light Savings time!  Last week the House passed bill HR139, known as the Sunshine Protection Act (we kid you not) and is on to the Senate and then the President and its passage would make DST permanent.  If like us, you don’t know if that means falling back and then stay there or not falling back, we’re with you.  Apparently it means summer stays the same and we don’t move clocks in November and March.  As energy folks, we wondered if there was any meaningful difference in solar generation meeting load seeing how we basically gain an hour of sunlight at the end of the day.  Believe it or not, you can actually find a few studies on this and as you might expect, the results are less than riveting. These studies found that load shift might reduce overall load by 0.03%-.5% and obviously generation stays the same.  So, the real question, does this shift do anything to LMPs as price taking solar can stay on later in the evening displacing more expensive assets?  Also, how about the morning, does load shift as more lights and heaters need to stay on longer?  Frankly, and let this be a warning reminding this has to be your topic of last resort around the BBQ, we got bored with the whole thing and decided to let it be and we can find together this winter if this becomes law.  Also, the warning label to the topic, be mindful of your audience and tone.  You’d be surprised at the blow back pondering this topic in front of a mother with kids that need to stand in the dark waiting for the bus now- don’t ask us how we know.

One final tidbit to a sunny subject…back in 1974 during the oil embargo, this was tried.  The US instituted a two year experiment to stay on DST for evening sun with more electricity being created with oil.  The two year experiment was scraped after one year.  Apparently bus stop moms concerns are the same 40 years apart.

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RTO ATC, PEAK, & OFF-PEAK CALENDAR STRIP

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Checking in with RT

Some readers have asked about our staffer RT, so we decided to check in as it’s been a spell.  The timing seemed right after seeing one of the Coop monthly magazines and the summer recipes submitted by members.  Remembering RT had given us a fantastic popover recipe, we decided to check back in.

Since, as discussed in Cocktail Corner, it is BBQ season, we decided to find out what’s on RT’s grill.  We missed him on the 4th, and maybe it’s too early for Labor Day?  That said, knowing RT and his grilling skills, we probably need some time to perfect what he’s making before serving to our guests so the early start on Labor Day seems appropriate.

RT, after that popover recipe you gave us, we need to know what’s on the grill this summer?  ‘Oh, well I don’t go all out on the grill like I do pastries.  A twelve pack of Oscar Myer paired with a twelve pack of Coors Light and a couple bags of Lays is my go to for guests.’.  There you have it folks, a culinary wizard.