Is it possible that the energy markets have been both boring and interesting at the same time? We would argue, yes.

On the boring side of the scale, energy prices have leveled and seem to have truly found a home. The prompt-month June 2023 contract has traded between $2 and $2.50 since the end of March. Last week, it further centered itself between $2.10 to $2.30 and showed very little willingness to move out of that range.

Looking at the fundamentals, it is hard to argue with low $2 pricing, but also hard to imagine prices getting much lower. Daily production is consistently above 100 BCF per day and storage is therefore refilling at a strong clip. Weekly injection reports have been very strong to start the season, and we’re currently at the second-highest inventory level for this time of year in the past five years. The only year to eclipse this level was an asterisked 2020 where the world was turned upside down by the COVID pandemic. As we progress through the summer, that year will be a prime benchmark as many analysts expect to eclipse 2020 levels by the fall. With ample storage already a contributing factor and very full storage expected by the end of the injection season, it’s no wonder summer prices have found a home in the low $2s.

Winter Is Coming

Despite these strong bearish undertones, the upcoming winter seems to refuse to give up any ground. While the prompt-month is trading in the low $2s, January 2024 is trading in the upper $3s. For example, as of 9 a.m. on 5/15/23, June 2023 was at $2.35 and January 2024 was at $3.90. The $1.55 difference equates to a 66% premium. Energy traders are clearly not ready to overly discount winter pricing just yet. With so many factors playing into energy prices, traders remain on the lookout for changes in any of the fundamentals:

• Will production stay strong or will producers scale back?
• Will it be a warm summer or milder?
• What about upcoming winter temperatures after coming off a very mild winter ’22-’23?
• Will energy prices in Europe and Asia explode again this summer?
• Will the U.S. enter a deep recession?
• Less likely, but are we at risk for another LNG plant going offline?

Beyond these uncertainties, looking at power markets makes things even more interesting. While a national index is not available for power, looking at prices in the Ohio market, we are seeing much wider price points than in natural gas. June 2023 power is trading at $33 per MWh while January 2024 is trading at $81 per MWh. That $48 difference equates to a 145% premium.

Electricity Is at a Premium

The January premium increase from the current June pricing is far more significant in electricity (145%) than in natural gas (67%). One reason for this is that power markets depend on natural gas-fired generation for most of their incremental usage. In other words, coal and nuclear meet baseload or consistent demand, but natural gas generators can turn on and off easily and meet incremental demand as it comes and goes. While natural gas is abundantly available in the summertime, that’s not necessarily the case in the winter when power generation competes with heating homes and businesses. On a cold winter day, natural gas is especially valuable for both gas and electric heaters. With that context, it makes sense that winter power prices come at a significant premium.

We are seeing the volatility and premiums in power prices play out in another unique way: default utility rates. In many states, including Ohio and Pennsylvania, the default utility rate is determined through a series of competitive auctions intended to get supply at fair market rates. While many default rates have historically been low, participants in this process are starting to see increased risks to serving these loads as energy prices and demand each fluctuate significantly.

Auctions Driving Higher Prices

The most recent auctions, which establish default prices beginning in June 2023, have come in at significantly higher prices than in more recent years. For example, FirstEnergy of Ohio default rates are more than doubling from around 6 cents per KWh to north of 12 cents per KWh. AEP Ohio rates are jumping 57% from 7.5 cents to nearly 11.8 cents. A Public Utilities Commission press release can be found here: https://content.govdelivery.com/accounts/OHPUC/bulletins/358c03b

To be clear, IGS Energy’s pricing will not be experiencing these same overnight hikes come June. We always quote using market rates, and any increase in pricing in market costs is already reflected immediately in our costs and quotes. Customers wishing to avoid utility price spikes, or discuss the energy market in more detail, should reach out to their IGS Energy point of contact.